Iron ore market to stay strong in 2009: forecasts

The iron ore boom continues, with the market expected to stay firm through next year, according to a report by the Iron Ore Trust Fund of Geneva-based United Nations Conference on Trade and Development (UNCTAD).

Published in June in co-operation with Stockholm-based Raw Materials Group, The Iron Ore Market 2007-2009 reports that price increases agreed to so far this year vary from 65-97% — the highest ever.

Iron ore prices are soaring because demand has grown faster than expected, says the Iron Ore Trust Fund, while growth in production has been delayed by a lack of infrastructure, equipment delivery delays, and a shortage of skilled labour. Putting further pressure on prices is the small number of major iron ore producers, which are at an advantage when negotiating with the fragmented steel industry.

The three largest iron ore companies, Vale, Rio Tinto and BHP Billiton, together control 35% of the market. Should BHP succeed in its takeover bid for Rio Tinto — formally announced in February — it would lead to further industry concentration.

The concentration in seaborne iron ore is even higher: Vale alone controls 36% of the total world market for seaborne iron ore, and the three largest companies control 69%.

Moreover, iron ore producers are aware that steel producers have raised prices and therefore can handle higher raw material costs, the report notes.

BHP recently announced an agreement to sell fine iron ore to China’s Baosteel at about US$145 per tonne, up 80%, and lump iron ore at about US$202 per tonne, up 97%.

This year, the Chinese lost the lead in iron ore price negotiations as Vale signed the first agreement for 2008 with Nippon Steel and Korean company POSCO.

In order to limit the pricing power of iron ore producers, steel producers are creating a network of captive coal and iron ore mines, or building holdings in these mining sectors. For example, ArcelorMittal, the world’s largest steel company, recently announced it was buying small U. S. miner Mid Vol Coal Group.

World use of finished steel products increased by 6.6% in 2007 to 1.2 billion tonnes, while world crude steel production increased by 7.5% to 1.34 billion tonnes. Growth continues at a high rate into 2008. Steel demand in China grew by 13% in 2007, and, remarkably, by almost the same percentage in the Middle East.

Steel production in China increased by 16%, and it now accounts for a little more than a third of world production. China, which became a net steel exporter only in 2005, accounted for 21% of world steel exports in 2007.

World production of iron ore grew by 9% in 2007 (compared with 12% in 2006) to 1.6 billion tonnes. Output increased mainly in the four major producing countries: Brazil, China, Australia and India. Mine production in China grew at a faster-than- expected 20%. With a production rate of 332 million tonnes of iron ore — 20% of world production — China strengthened its position as the world’s second largest producer, just behind Brazil and well ahead of Australia.

World iron ore exports increased by 8.1% (compared with 6.1% in 2006) to 822 million tonnes. Brazil is now the leading exporter at 269 million tonnes, overtaking Australia. Indian exports grew for the seventh consecutive year, and at 94 million tonnes, the country is the third most important exporter, well ahead of South Africa, Canada and Russia, each with exports in the 25-to 30-million-tonne range. China, which imported 383 million tonnes of iron ore in 2007, or 46% of world iron ore imports, continues to be the most important importing country, followed by Japan, Germany and Korea. Europe, excluding the Commonwealth of Independent States, accounts for 21% of world imports.

Seaborne iron ore trade has increased by 9% to 799 million tonnes. World production of pellets reached 326 million tonnes, up 1.5%. World exports of pellets were 137 million tonnes, an increase of 3.9%. The share of pellets in total iron production fell sharply to 20% in 2007, but there are signs that will rise.

Nearly 130 million tonnes of new iron ore mining capacity was brought into production in 2007, considerably more than in 2006. The focus for new developments is changing to Brazil and West Africa from Australia. In total, more than 600 million tonnes of new capa- city is planned to come on-stream between 2008 and 2010, compared to demand growth of 340 million tonnes over the same three-year period, based on projections by the International Iron and Steel Institute. However, of the 600 million tonnes, around 336 million tonnes are in the certain category, with 77-167 million tonnes in the probable category, and 196 million tonnes in the possible category.

So it would appear that the projects in the certain category would satisfy the demand growth completely, while any further projects would create an over-supply in 2010 or 2011 at the latest. This outcome is far from certain because of the many obstacles and bottlenecks standing in the way of new projects. However, in view of the size of the potential surplus, an over-supply could happen, especially if demand is lower than anticipated. The outcome depends heavily on the ability of Chinese producers to expand production. If freight rates remain high, these producers will continue to enjoy a competitive advantage.

UNCTAD concludes that the iron ore market will most likely continue to be tight until 2010, or perhaps even 2011. There are several indications that prices will increase further in 2009 but the outcome for the following years is more uncertain. At the same time, it appears likely that trade in iron ore will become more diverse, with shorter-term arrangements and flexible pricing systems playing a larger role and the decline of the benchmark negotiating system.

In a research note from late June, Citigroup analyst Alexander Hacking said that China is attempting to de-stock iron ore, causing spot prices to decline to US$185 per tonne from US$205. Meanwhile, demand from Chinese pig iron production has risen by 9% since January. Citigroup believes that in the short term, Chinese de-stocking will continue, resulting in reduced imports and continued spot price weakness.

However, in the long-term, high-quality iron ore remains undersupplied. Supply disruptions have more than offset softer consumption in 2008, and Hacking forecasts that strong Chinese demand, coupled with continued supply issues, will produce another tight market in 2009. The research note says that India has introduced a 15% export duty on iron ore, a symptom of supply problems.

For 2010, Citigroup forecasts Asia prices for iron ore at US$262 per tonne for lump iron ore (Brockman) and US$188 for fine iron ore (Yandi or Brockman).

Long-term projections are US$115 per tonne for lump iron ore (Brock- man), US$90 for fine iron ore (Brockman), and about US$85 for fine iron ore (Yandi).

Deutche Bank, in its Commodities Quarterly in late June, projected that the iron ore market will remain tight until 2011, when it will swing into surplus. The bank forecasts Australian export lump iron ore will reach about US$206 per tonne in 2009, gradually declining to about US$82 in 2013. Australian export fine iron ore is projected to reach about US$162 per tonne in 2009, declining to US$64 by 2013.