Australia will lose share over the next five years in the global iron ore market to Brazil because of the latter’s high grade iron ore reserves and exports, according to a new report on the mineral from Fitch Ratings’ offshoot, Fitch Solutions.
The loss won’t be much in percentage terms, but in terms of tonnage, Brazil’s production is projected to grow at four times the rate of growth forecast for Australia.
The Fitch report, which appeared earlier this week, says global iron ore mine output growth will average 2.4% over 2021-2025 compared to the fall of 2.0% over the previous five years (which has helped boost prices as it met the surge in demand for steel in China from 2019 onwards and especially in the past year).
That fall was driven by the impact of two mine tailings dam disasters in Brazil in 2015 and then early 2019 which saw output from that country slump sharply.
As well, weather-related problems in Australia and Brazil also impacted production and exports in most years from 2015 to 2020.
Fitch says the 2.4% annual growth will see annual production 378 million tonnes higher in 2025 compared to 2020 levels.
Fitch says that is roughly the equivalent of India and Russia’s combined 2020 output.
According to Fitch, supply growth will be primarily driven by Brazil and Australia.
“In China, we expect annual output levels to stabilise after a dramatic decline in recent years, which will reduce the drag that China has on global output levels,” Fitch says.
“Nonetheless, as China’s miners operate at the higher end of the iron ore cost curve and domestic ore grades will continue to decline, we expect Chinese firms to prioritise investment in overseas iron ore mines, such as the enormous Simandou deposit in Guinea.”
The Chinese government said this week it would press its local producers to lift production and ore quality – something they have been unable to do in recent years as the mines access lower and lower grade ore which cannot be upgraded without heavy spending on pellet or concentrating plant – which is the wrong type of feed for most of the country’s blast furnace operators which use sintered fines.
“Domestically, we will intensify the exploration and development of iron ore resources, accelerate the construction of new and ongoing iron ore projects, and improve consumption of recycled iron-steel materials,” Jin Xiandong, a spokesperson for the country’s National Development & Reform Commission (NDRC), said at a press conference in Beijing on Tuesday, May 18.
“Internationally, we will encourage qualified enterprises to actively develop overseas,” he said in a reference to Chinese projects in Gabon, Mozambique (both of which are linked to the controversial Belt and Road debt burden scheme).
The big Chinese (and Australian, through Rio Tinto) is the Simandou project in Guinea with its 65% plus high-grade ore (similar to the ores of Brazil’s Carajas region). It is not due to produce ore until 2026-2027 at the earliest and it will be a high-cost operation.
All this is clearly being done to reduce its dependence on Australia and to replace existing blast furnace tecnology, cut capacity and slash emissions by pushing for smaller plant using green steelmaking technologies or higher-grade ores with their high crude steel yields.
This is why Brazil’s iron ore is going to be consumed in greater quality in China.
That has already shown up in the surge in the price of 65% fines produced by Brazil which have extended their price spread over the 62% Fe fines and 58% Fe fines exported by Australia.
Fitch says this is why Brazil’s iron ore production growth will rebound in the coming years following contraction over 2018-2020 in the wake of the two mine dam disasters
Low operating costs, a solid project pipeline and Brazil’s high-quality iron ore increasingly favoured by Chinese steel producers will all contribute to higher output, according to Fitch
“We forecast Brazil’s iron ore production to increase at annual average rate of 5.9% over 2021 to increase from 391 million tonnes in 2020 to 529 million tonnes in 2025.”
Vale, the big Brazilian miner has an ambitious plan to grow it production by around 100 million tonnes over the next five years to 400 million tonnes a year or more (from around 330 million tonnes at the moment).
For Australia Fitch forecasts iron ore production to grow at an annual average of 1.7% over 2021-2025.
“While significantly slower than 3.4% over the previous five years, this would still lift annual output by 84 million tonnes compared to 2020 levels by 2025.”
Australia produced 911.8 million tonnes in 2020, so output will be nudging a billion tonnes by 2025.
That is far less than the 144 million tonnes the Australian government’s Office of Chief Economist reckons will be produced by 2025-26.
Already there are a number of projects designed to fill that gap or replace existing tonnage.
BHP’s South Flank mine started this week producing ore to replace the long-standing Yandi mine in the Pilbara.
South Flank will ramp up to produce 84 million tonnes of high-grade ore sufficient to lift the average grade for BHP ore exports to 62% from 61%.
The Roper Bar mine in the Northern Territory has recently restarted production. Nathan River, which owns the site, has announced that the project is expected to ramp up to 1.5-2 million tonnes of production each year from this year.
NT Bullion’s new Frances Creek mine is also producing on schedule, following its opening in August 2020. Output is shortly expected to reach 2 million tonnes a year.
These are high-cost operations compared to the costs of the big three in the Pilbara and any sustained price falls will see tem under pressure to close.
Fortescue’s newly developed Eliwana project is successfully ramping up, with output expected to reach almost 30 million tonnes a year from 2021. The company’s Iron Bridge magnetite mine is coming on stream next year with 22 million tonnes of ore.
Rio Tinto’s new Koodaideri mine has an even larger potential, and is ramping up towards an output of around 40 million tonnes a year from 2022.
Other sources of new output include Magnetite Mines’ Razorback project in South Australia, Strike Resources’ Paulsens East project in Western Australia, and Grange Resources’ proposed expansion to its mine in Tasmania.
Looking beyond 2025, Fitch sees lower prices which will eventually put a lid on production growth rates.
It forecast annual production growth to average just 0.4% over 2026-2030, with output levels stagnating by the end of the decade.
“Production growth will stagnate over the longer term and we forecast production to actually peak around mid-decade at around 1.05 billion tonnes.
This production slowdown will be due to mothballing of mines by junior miners and a pullback in capital expenditure by larger firms as iron ore prices decline,” Fitch Solutions said in its report.
Meanwhile Thursday saw another down day for iron ore prices. 62% Fe fines delivered to northern China eased $US4.31 to $US211.85 a tonne to take the two fall to more than $US12.50 a tonne, or close to 6%.
The price of 58% Fe fines fell $US4.90 to $US180.81 a tonne, taking the two day fall to $US11.89 a tonne. And the price of 65% fe fines from Brazil fell$US3.60 to $US245.10 a tonne, down $US13.60 in two days or more than 5%.
The weakness since Tuesday came on the back of the strong warning by the Chinese government and the country’s central bank that speculation, market manipulation and other acts would be hit hard. The warning rattled copper prices and hit the crypto currency market hard.
