Analysis: China’s iron ore supply situation through 2010

Tuesday, 08 March 2005 14:11:00 (GMT+3)   |  
       

Analysis: China’s iron ore supply situation through 2010

China’s pig iron output increased sharply in recent years, reaching 252 million tons in 2004, which was 50 million tons higher than 2003 and 120 million tons higher than 2000. The rapid development of the steel industry has played a large part in the rise of domestic demand for iron ore. Limited domestic supplies of iron ore means that China has had to rely more and more on imported iron ore to feed its blast furnaces. China’s sharply increasing demand for imported ores has in turn caused the global supply of iron ore to tighten. Thus, the iron ore supply situation at home and abroad will significantly influence China’s steel market in the future. The following briefly analyzes China’s future iron ore supply situation. First, a look at the imported iron ore supply situation. In 2004, China imported 208 million tons of iron ore, an increase of 60 million tons year-on-year. Among all imported ores, 85% were from Australia, Brazil, India and South Africa, whereas this figure was 93% in 2003. It is obvious that high prices have encouraged other countries to enhance their ore export to China. In terms of import quantity, during 2004 China’s imports of iron ore from Australia increased 20 million tons, while imports from India, Brazil and from other countries increased 18 million tons, 7 million tons and 15 million tons respectively. Surging exports from India and other countries satisfied China’s iron ore demand in 2004 as Australian and Brazilian mine owners were busy expanding production capacity. In terms of global supply, iron ore is abundant in the world, with around 800 billion tons of reserves. From that, more than 230 billion tons of metal content could be extracted. The current iron ore supply tightness, which is predicted to last only for the short term, is simply a temporary function of insufficient production capacity. Thus iron ore supply will become stable, driven by long-term interests of suppliers and purchasers, as production capacity gradually increases. As to mine expansions, global iron ore production capacity will possibly increase 50% in order to meet market demand in future years. Three global iron ore giants are currently investing to expand their production capacity. For Rio Tinto, production capacity will grow 50 million tons by 2006, with an additional 40 million tons by 2010. For BHP, production capacity will increase 35-40 million tons by 2007, with an additional 30 million tons by 2010. For CVRD, production capacity will raise 70 million tons by 2010. Also, Fortescue Metal Group Limited (FMG) plans to develop a new 50 million ton capacity mine this year. Furthermore, some new projects are also underway, such as Guinean Nimba’s iron ore project of 45 million tons, South African Sishen’s iron ore expansion project, the Casa mine construction project by Brazilian CSN Company and Mauritanian Guelb’s iron ore project of 18 million tons. It is projected that iron ore production capacity during 2005-2010 will increase more than 300 million tons throughout the world. This means that the global iron ore trade will reach 900 million tons by 2010. In 2004, the global iron ore trade came to 585 million tons, 65 million tons higher year-on-year. Countries depending on imports, such as EU members, Japan and the US, showed iron ore import growth of 5 million tons, while China’s iron ore import increased 90%. As for the scheduling status of recent expansions by major global mining enterprises, the seaborne iron ore trade quantity will increase 60 million tons in 2005, 80 million tons in 2006 and 90 million tons in 2007 according to various estimates. In 2005, China’s pig iron output will continue to expand rapidly, and the bulk of the additional 60 million tons produced globally will be exported to China. The pig iron output of major global iron ore importers is forecasted to increase 3.5 million tons or so in 2005, i.e. the ore import will rise 6 million tons in order to meet the demand. For China, iron ore import will rise 54 million tons, with total imports reaching 260 million tons in 2005 and 320 million tons in 2006. However, even though the global ore market will affect the construction scale of iron mines, India is also currently going through a period of high growth, which means India’s iron ore self consumption will increase in the future as the country looks to feed its own new steel mills. Such a scenario could lead to dwindling export space. Now to examine China’s domestic iron ore supply situation. In recent years, domestic ore price increases have spurred iron ore exploration in China. According to national statistics, domestic raw ore output in 2004 was 310 million tons, growing 22% year-on-year. China’s iron ore reserves total 11.5 billion tons with low Fe contents. Provided that the annual pig iron output made of Chinese-origin ores is 130 million tons, China’s iron ore reserves will be depleted in 30 years. The stagnant iron ore market situation of previous years limited production capacity expansion. Yet during 2003-2004, China’s ore output increased greatly with former capacity. Along with surging iron ore demand in China, Chinese mining enterprises have been busy in expanding their production capacity. According to preliminary statistics, around 40 projects with capacities greater than 1 million tons are under construction or in preparation now. The total raw ore productivity of these projects is projected to exceed 100 million tons. These projects will be put into production over the next three years. Thus, it is projected that China’s finished ore supply will increase 20 million tons or so in 2005, and another 20 million tons in 2006. However, private iron ore exploration has reached more than half of national total output, and these private iron mines’ production situation will be largely determined by iron ore price level. Thus, China’s domestic iron ore production growth rate may possibly drop after 2006. China’s domestic finished ore output will come to 210 million tons in 2005, and the max import volume may reach 260 million tons, resulting in a total of 470 million tons of ore supply. Such supply would meet market demands of 310 million tons pig iron output. Moreover, China’s total iron ore supply quantity in 2006 may reach more than 550 million tons, meaning it could meet 360 million tons of pig iron production. In terms of China’s pig iron production capacity, China’s blast furnace productivity volume totaled 330 million tons in 2004. Some more furnaces will become operational in 2005, adding 58 million tons of capacity. Thus, China’s iron ore supply situation will still be lower than pig iron productivity level. In 2005, even though major global iron ore suppliers have carried out production expansion, the iron ore supply increase will be quite limited as many of the projects may not be completed in 2005. Under China’s booming demand and the depreciating US dollar, foreign iron ore suppliers naturally required an iron ore price increase. Iron ore price agreements made by Nippon Steel and Posco, among others, mean that China’s imported iron ores price will increase 200 Yuan. At the same time, the international iron ore price increase may prompt China domestic mining enterprises to hike the price on their products. Meanwhile, China’s domestic blast furnace productivity will reach 370 million tons in 2005 and actual pig iron output may reach 320 million tons, meaning that the country will exceed iron ore supply capacity for the pig iron productivity increase. Thus, Chinese steelmakers may scramble for iron ore in 2005. In addition, the current tight sea and railway transportation will not change over night, which means the costs will be passed on to ore market. Furthermore, the global oil price will fluctuate in high levels, promoting imported ore cost. However, long products manufacturers may demand less ores if the iron ore price exceeds their affordability levels, which may help constrain iron ore price increases. Therefore, it is projected that China’s domestic iron ore market will suffer a comparatively tight situation in 2005, similar to the situation in 2004. Meanwhile, the price of imported iron ore will rise to a certain degree, affected by foreign suppliers’ price increases and the tight transportation situation. In turn, domestic iron ore prices will be influenced by the imported ore price level on one the hand, and the steel market situation on the other. Thus, it is estimated that China’s domestic iron ore price will fluctuate at high levels along with the supply and demand situation and steel market trend. In terms of long-term development for the ore market, China’s iron ore supply growth rate will slow down to certain extent during 2006-2007. However, things will improve along with foreign large-scale production capacity exertion and enlarged transportation capability. Based on the current market trend, China’s steel demand will weaken after 2006, as will iron ore demand. At the same time, global iron ore supply will continue to surge, bettering China’s ore supply situation and affecting domestic ore supply. All in all, China’s iron ore import growth will slow down in 2006, but continue to grow nonetheless through 2010. In order to meet demand, both domestic and foreign ports are undertaking port enhancement projects. Among the total, the 300 thousand ton iron ore dock in Dalian port and 200 thousand ton iron ore dock in Tianjin port have been put into operation. Meanwhile, plans are in the works for 200 thousand ton iron docks at the Zhanjiang port, Rizhao port and Cafeidian port. All these will help to enlarge China’s imported iron ore handling capacity. Moreover, as China will have mounting dependence on imported iron ore in the future, China’s steel industry will experience corresponding change in line with the raw material supply location. Along with operation of newly built docks, steel productivity along costal areas will expand. By now, many domestic steel enterprises have actively explored the international market. Baosteel, Wuhan Steel, Maanshan Steel, Shagang, Tangshan Steel, Nanjing Steel, Shougang, Kunming Steel, Anshan Steel as well as Tonghua Steel have all invested in foreign mining companies to explore iron ore in Australia, Vietnam, Peru, Mongolia, Russia and South Korea. Such a trend is expected to continue.

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