22/04/14 – China’s plan for iron ore giants hits snag

Reuters reported that China’s bid to slash its dependence on foreign iron ore miners by creating its own mega producers risks running aground before it starts due to high costs and poor quality of ore. Instead, overseas suppliers may end up shipping more to their top market.

For two decades, China has been trying to reduce its reliance on iron ore supplied by top producers Vale, Rio Tinto and BHP Billiton without much success because the price of the ore it produces is higher.

These global miners are boosting output to capture more of the Chinese market through massive expansion schemes to increase their dominance. BHP on Wednesday lifted its annual iron ore production guidance to 217 million tonnes, while Rio Tinto is close to mining 300 million tonnes a year and Brazil’s Vale is targeting more than 360 million tonnes.

In an effort to make its own iron ore mining more efficient, China which buys more than two thirds of the world’s iron ore, is drafting a plan to create six to eight domestic iron ore miners by 2025, each with an annual capacity of more than 30 million tonnes.

Beijing wants Anshan Iron & Steel Group, a steelmaker with its own iron ore mines, and the Metallurgical Mines’ Association of China to lead the plan. A draft is expected by year end to be submitted to the State Council for approval.

However, combined production would at best amount to only a third of total demand, making a target to cut imports to below half of China’s requirement within 10 years look impossible and suggests big global miners may have to ship even more. While Chinese iron ore production continues to grow every year, the low quality of the ore is forcing miners to dig deeper and bloating costs even more.

A senior official at a medium sized Chinese miner with annual output of 2-3 million tonnes said that the only way for the new integrated miners to compete against top miners is if they can slash their costs, but I do not expect this can happen.

Chinese resources require deeper and deeper digging, and grades are falling, meaning both mining and beneficiation (crushing and separating ore) costs are increasing.

Mr Pan Guocheng CEO of China Hanking Holdings Ltd said that “The average iron content of ore in China fell to 21.5% last year from 31.2% 10 years earlier.”

According to MMAC, in contrast, iron content for most Australian and Brazilian ore tops 57%. This lifts the average cost for Chinese miners to USD 105 per tonne, with some spending as much as USD 140, compared with USD 60 to USD 65 including delivery for Australian and Brazilian ores.

Source – Reuters, www.minesguru.com