The article below, penned by Rhiannon Hoyle, was published in The Australian overnight. It should be good news for Grange and highlights the value of the undeveloped Southdown deposit in WA.
Iron ore miners under pressure to supply higher-grade ore to China
China’s steel sector is demanding ore imports with higher iron content. Picture: Reuters
Rhiannon Hoyle
The Wall Street Journal
1:21PM June 5, 2018
Miners are encountering a new threat to their recovery from a deep downturn: China, which buys two-thirds of global iron ore exports, is getting pickier about the kind of iron ore it wants.
The price gap between ore with high iron content and lower iron content has doubled in the past two years — prompting a major rethink in strategy among mining companies used to finding ready buyers in Asia for all types of ore.
The yawning price differential is a consequence of a shift in China’s more profitable steel sector toward bigger, greener mills, which run better on higher-grade ore.
China has been forcing the closure of older steel plants that typically use cheaper ore with a 58 per cent iron content — and contribute to making Chinese cities among the smoggiest in the world. Low-grade ore leads to more smog than grades of 60 per cent or more because it has to be combined with a lot more coal to produce a ton of steel.
“China will never be seen as a superpower if they continue to pollute as if there is no tomorrow,” said Lourenco Goncalves, chief executive of Cleveland-Cliffs, a Cleveland-based mining company.
Companies that specialise in exporting low-grade ore have fallen out of favour with investors as unwanted material piles up at China’s coastal ports.
Shares in Fortescue Metals Group, a producer of lower-grade ore, are little changed over the past year, whereas shares in BHP Billiton and Rio Tinto stock have surged.
Fortescue has a plan to change that. The world’s No 4 shipper of iron ore last week said it would spend more than $US1 billion ($1.3bn) to construct the new Eliwana mine in Western Australia’s Pilbara region as part of a drive to export mostly high-grade ore.
Ore from the new pit will be blended with lower-grade material dug up from Fortescue’s existing mines in the region. Until now, those mines had formed the bedrock of Fortescue’s strategy of increasing exports to Asia to challenge BHP and Rio Tinto.
Together, the three companies’ Pilbara mines contribute more than half the global trade in iron ore by sea.
“It is about investing in the long-term sustainability of our business,” Fortescue chief executive Elizabeth Gaines said.
Cleveland-Cliffs is also seeking to protect profits, closing its low-grade iron ore business in Australia to focus on producing pellets high in iron from its mines in Michigan and Minnesota.
Vale, based in Rio de Janeiro, has decided to cut back low-grade output and restart idled plants in southeast Brazil that help it produce better quality product. It also has signed deals with major Chinese ports to blend ore after it arrives in the country to match demand for different quality material at any given time.
BHP, the third-largest iron ore exporter by volume, is considering developing a new mine at a high-grade deposit in the Pilbara to blend with lower-grade ore and lift its average grade to 62 per cent from 61 per cent. A decision on that South Flank project is expected mid-year.
Adjusting to China’s changed market isn’t easy for mining companies, whose low-grade ore makes up around one-fifth of all shipments globally. New pits can require years and billions of dollars to build. Yet to lift their high-grade portion without building new mines, companies would have to either cut overall shipments or stop mining in some pits earlier than planned.
Costly investments in iron ore might not sit well with some investors who want mining companies to switch focus to copper or to battery materials such as cobalt or lithium, which are used in everything from electric vehicles to air conditioners.
Miners counter that iron ore investments make sense because they lead to products that fetch premium prices, bolstering profits.
“It seems quite unlikely that we’re going to see any change in the behaviour of this market in the next couple of years at least,” Vale chief executive Fabio Schvartsman said.
Fortescue aims to have its new Eliwana mine running by the end of 2020, but is pushing to get sales of higher-grade ore under way sooner. Ms Gaines said the company would next year start offering small batches of a new “premium” product, sourced from existing mines, to win over customers early.
GRR Price at posting:
18.5¢ Sentiment: Hold Disclosure: Held
(20min delay)
