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Monday, October 20, 2003

Global Iron Ore Prices Rocket-Up on the Back of China's Growth

I've had a Couple of interesting pieces of feedback about my 'Gloom and Doom Brigade' post last Friday. I will get back to the substance of the feedback when I have more time to do it justice, but for now, to clarify one point. I said that ideas like the Olduvai theory were flawed, and 'flawed probably because it places too much emphasis on resource shortages'. This was to glib and too easy. Indeed I even went so far as to ask: "why is it that only people with flawed ideas interest themselves in these (interesting and important) problems", and in saying this I obviously went too far, too far, because it might be construed by implication that it was my opinion that all who are interested in this are flawed. This is not the case. I was letting rhetoric get the better of me, and expressing frustration that I had not found something better. Don't worry, in the post box people have been busy trying to put me straight. Meantime, since I do thing scarcity of resources can become a problem for all of us, just look at what is about to happen to iron ore prices consequent on China's rapid economic growth:

Cia. Vale do Rio Doce, Rio Tinto Group and other iron ore exporters may win a 9 percent price increase next year as demand soars because of surging Chinese steel production, AME Mineral Economics said.

China's building and construction expansion will catapult Asian steel output to almost equal the rest of the world's production by 2008, the Sydney-based consultancy said.

Surging demand could raise prices to 33.5 U.S. cents a dry long ton unit for ore known as high-grade fines next year, when suppliers, such as BHP Billiton agree on contracts with Japanese and European steelmakers. Prices reached 30.83 U.S. cents for the year beginning April 1 -- up 9 percent from the previous year. "Our expectations are that there would be a substantial increase next year, mainly driven by China,'' Barry Eldridge, managing director of Australian iron ore exporter Portman Ltd., whose shares have gained 53 percent this year, said in an interview. ``On an average day, we'd knock back between eight and 11 inquiries we can't meet. We don't see any slackening in demand for at least two or three years.'' Shares of London-based Rio Tinto have gained 6.5 percent on the Australian Stock Exchange this year and rose 1 cent to A$36.16 today. BHP's shares ended trading down 28 cents, or 2.3 percent, to A$11.82 on the exchange, paring their gain since Jan. 1 to 16 percent. Portman shares were unchanged at A$1.50.

Australia is the world's largest iron ore exporter and the increase in prices is forecast to help boost the nation's earnings from the commodity to a record A$5.97 billion ($4.1 billion) in the year ending June 30, 2004, according to the government's commodity forecaster.

Surging iron ore demand is also benefiting South Korea, where Posco, the country's biggest steelmaker, reported a 32 percent jump in third-quarter profit this month. No. 2-ranked INI Steel Co. said today third-quarter operating profit leaped 47 percent because of higher prices. "Given the tight market conditions expected to prevail through next year, contract prices for premium Australian fines will return to levels not seen since 1991,'' AME said in a faxed statement. Further increases are expected in 2005, it said. In China, the world's largest producer and consumer of steel, investment in fixed assets rose 32 percent in the first eight months of this year as companies such as China United Telecommunications Corp. installed equipment and the government built roads, bridges and dams, the Beijing-based National Bureau of Statistics said last month.

"The sheer scale of the infrastructure development that is taking place in China should see demand for steel products remain strong at least until the Beijing Olympic Games in 2008 and the Shanghai Expo in 2010,'' Brian Kruger, chief financial officer of BHP Steel Ltd., Australia's largest steelmaker, told the American Chamber of Commerce in Australia on Friday in Melbourne. Rising prices are spurring expansion plans for Brazil's Vale, the world's biggest iron ore exporter, Rio Tinto, the second- biggest, and No. 3 ranked BHP, AME said. "Producers are scrambling to expand capacity, consumers are racing to secure supply and the industry is attracting new players like moths to a candle,'' AME said. Rio Tinto said last month Chinese iron ore imports may surge to more than 250 million tons a year by the end of the decade, after importing more than 100 million tons last year. Chinese steel demand may rise to between 275 million and 300 million tons a year, also by the end of the decade, Rio Tinto said.

To meet rising Chinese iron ore demand, Rio is expanding the capacity of its Hamersley Iron mine in Western Australia state. Iron ore accounted for 33 percent of the Anglo-Australian miner's net profit in the first half. Rio, BHP Hamersley will have capacity to export 85 million tons of iron ore in 2004, from 74 million in 2003, Rio has said. Rio's Robe River venture may also expand the capacity of its West Angelas mine to 25 million tons a year, the company said. Melbourne-based BHP is spending $65.5 million accelerating expansion of its iron ore business. Its 85 percent-owned Mining Area C iron ore project in Western Australia will be officially opened Oct. 30. "China's ravenous appetite for iron and steel is powering a global iron ore boom,'' AME said. Global iron ore demand will increase by more than 6 percent this year to 1.1 billion metric tons and reach an annual pace of more than 1.35 billion tons by 2008, the consultancy said.
Source: Bloomberg

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