China's plan for iron ore giants hits snag

High costs and poor quality of iron ore may jeopardise China's bid to reduce its dependence on foreign suppliers by creating domestic giants

PUBLISHED : Saturday, 19 April, 2014, 1:09am
UPDATED : Saturday, 19 April, 2014, 1:25am

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 to increase their dominance. BHP lifted its annual production guidance on Wednesday 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.

To make its own iron ore mining more efficient, China, which buys more than two-thirds of the world's iron ore, was drafting a plan to create six to eight domestic miners by 2025, each with an annual capacity of more than 30 million tonnes, Xinhua reported.

Chinese resources require deeper digging, and grades are falling

Beijing wants Anshan Iron & Steel, a steelmaker with its own iron ore mines, and the Metallurgical Mines' Association of China to lead the plan. A draft is expected by the end of the year 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 the country's requirement within 10 years look impossible and suggesting 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.

"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," said a senior official at a medium-sized Chinese miner with an annual output of 2 million to 3 million tonnes.

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

The average iron content of ore in China fell to 21.5 per cent last year from 31.2 per cent 10 years earlier, said Pan Guocheng, chief executive of privately owned miner China Hanking.

In contrast, iron content for most Australian and Brazilian ore tops 57 per cent. This lifted the average cost for Chinese miners to US$105 a tonne, with some spending as much as US$140, compared with US$60 to US$65 including delivery for Australian and Brazilian ores, the mines association said.

If the iron ore price dropped below US$100, then 40 to 50 per cent of Chinese miners could close their mines and cut output by about 150 million tonnes, Pan said in February.

At about US$117 a tonne currently, iron ore has lost nearly 13 per cent of its value this year and is down about 40 per cent from a peak of almost US$200 in February 2011.

Since 2003, China has also urged its steelmakers to cut their dependence on Vale, Rio Tinto and BHP by investing in new mines globally, with the aim of sourcing at least 40 per cent of imports from China-owned projects. But with high costs and weaker prices, projects have struggled to get off the ground.

A 25 per cent tax on sales is another disincentive for Chinese miners, while Australian and Brazilian miners are taxed at a rate of only 4 to 5 per cent.

China's iron ore output rose 4 per cent to 183.3 million tonnes in the first two months, slowing from 13.5 per cent last year, official data showed.

More stringent environmental protection measures targeting China's steel sector are also forcing mills to look for higher-grade imported iron ore.

Jeffrey Landsberg, managing director of Commodore Research & Consultancy, said low spot iron ore prices would continue to tip the market in favour of the big foreign suppliers.

"We anticipate that low iron ore prices will continue to put pressure on production growth in China this year, and that Chinese iron ore import growth will finish the year well above production growth," he said.