China will keep promoting independent iron ore producers as the industry’s price slump concentrates market power in BHP Billiton, Rio Tinto, Vale and Fortescue Metals Group, according to a senior banker advising miners in the sector. Damian Pearson, a resources banker at Deutsche Bank says that as the iron ore price tumbles, high-cost Chinese producers are increasingly being forced to shut their operations, and this is shifting more power to the hands of the big four iron ore producers. “China’s position here is interesting because its share of iron ore production is declining, and production is becoming more concentrated in the hands of the majors,”, he said. “But to China, this could be seen as a risk. What we could well see is that China will be looking to put its foot on some major projects to make sure it has the optionality to deliver resources in future.” He adds that one example of this was the $1.4 billion acquisition of iron ore and coal company Aquila Resources by Chinese steel giant Baosteel last July. Deutsche Bank advised Baosteel on the transaction. “What Baosteel now has is an option over a chunk of the Pilbara which could produce at least 40 to 50 million tonnes per annum.” He added that this illustrates that there “is an appetite from China to have long-dated sources of supply for material amounts of tonnage.” He added that last year’s $1.15 billion joint venture between Fortescue Metals and the Taiwanese plastic and steel company Formosa – which Deutsche Bank also worked on – showed that foreign steel mills were keen to secure some element of captive production. “The essence of that transaction was to secure a captive piece of a large iron ore project with a strong development partner at a time when Formosa was pursuing a 10 million tonne per annum steel mill in Vietnam. “It was important to secure captive sources of raw material, even though they may end up being a small part of the input.” Pearson added that Deutsche Bank had also worked with Sundance Resources Ltd, which is developing a major iron ore project in central west Africa, in raising $US40 million from the Ukrainian billionaire Gennadiy Bogolyubov. “It’s a security which is convertible into around 10 per cent of the company’s share capital. The logic behind that investment is that it ensures that the company is properly funded until it makes the decision on whether to proceed with the greenfields Mbalam-Nabeba project which will require an investment of $5 billion to $6 billion. “ Pearson says that these transactions demonstrated that despite the drop in the iron ore price, “there are parties that still see value there. And there’s also the strategic interest on the part of the Chinese to encourage third party independent producers.” In the meantime, he predicts that the smaller, higher-cost iron ore producers will struggle. “We’re seeing a market where a lot of the mid-caps and juniors have probably exploited a period of high commodity prices, and they have a cost base that isn’t sustainable in a low iron ore price environment.” As iron ore prices have fallen, he says, producers “either have to have high grade deposits, or they have to produce large volumes through existing infrastructure across a fixed cost base.” The Australian Financial Review
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