IT’S NOW AN ESTABLISHED TREND in the world’s mining industry that new projects and expansions of existing mines are failing to meet production deadlines. This means there’s no immediate end to high metal prices.
This is certainly true of the iron ore industry where expectations of a relatively modest single digit increase in contract prices, negotiated annually between the iron ore producers and the steel mills, may get converted into a double digit increase for 2008. Rio Tinto, which produces iron ore out of Australia, said recently it was battling to meet demand from China.
Rio Tinto and BHP Billiton are racing to produce more iron ore from the Pilbara region in Western Australia, but rising costs and a shortage of skills are constant hindrances. Another iron ore company, Fortesque Metals, has seen capital costs on its Pilbara project rise A$200m to over A$3bn.
Meanwhile, demand for iron ore continues to gather pace. Global steel production has outpaced market predictions and is up 3.8% for the first five months of the year compared with the corresponding period in 2006. Chinese imports of iron ore are 21% higher compared with last year.
“There’s speculation of a 20% plus price increase for next year taking lump to $111,50/t,” said John Meyer, an analyst for Numis Securities in a recent note. Analysts are currently assuming a 10% increase.
Kumba Iron Ore (KIO), in which Anglo American has a 65% stake, and Assmang, an unlisted business in which African Rainbow Minerals (ARM) has a 50% stake, are South Africa’s main iron ore producers.
“The demand/supply situation means we could have much higher than single-digit increases,” said Jan Steenkamp, who heads ARM’s ferrous metals division through which ARM holds its Assmang stake.
“It depends what the big boys do,” said Ras Myburgh, CEO of KIO referring to Brazil’s CVRD, the world’s largest iron ore producer, as well as Rio Tinto and BHP Billiton. If these iron ore producers take a short-term view, iron ore contract prices will leap substantially, booking upfront profits, said Myburgh. KIO reports interim results on July 27.
This might damage the market, however, which is why the mining houses may prefer a short-term view, said Myburgh. Both KIO and ARM warn of the consequences of hurting steel producers, which buy iron ore as a key ingredient in steel.
“If we continue to see increases in iron ore, we’ll really push the steel industry into dire straits,” said Steenkamp. “There are no new steel mills being built. They are running with old plants. So their margins are getting really squeezed,” he said.
Nonetheless, the earnings prospects for KIO and ARM’s ferrous metals division are promising. There are also expectations that KIO will announce a further expansion of its Sishen Iron Ore mine at Sishen South in the second half of 2007. Anglo American has made it plain that KIO represents a cornerstone of its ferrous metals unit. Annual iron ore from KIO could eventually reach 70 million tonnes from its current 42 million tonnes/year.
KIO’s share price is 39% stronger this year following its creation in November in the wake of the restructuring of Kumba Resources.
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