Engineering and Mining Journal - Whether the market is copper, gold, nickel, iron ore, lead/zinc, PGM, diamonds or other commodities, E&MJ takes the lead in projecting trends, following development and reporting on the most efficient operating pr
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In addition, Bradley's Enclosed Safety Shower, which is armed with an insulated fiberglass structure, fire ratings, and reliable chemical and corrosion resistance, provides superior washdown capability in harsh conditions. The Enclosed Safety Shower withstands harsh chem- icals and frigid weather conditions as it resists freezing up to –58°F. For information on Bradley's complete line of emergency fixtures, visit www.bradleycorp.com/products/safety/ or call 800-BRADLEY. project or one product or one geographical location, we will redirect our capital elsewhere or we simply will not invest," Kloppers said. "Of course, giving the long-life nature of the investments, we have to do so being very cognizant of changing demand patterns." Kloppers cited three generic scenarios that he says explain the majority of pricing behavior. "When markets are in surplus, decisions are driven by cash costs—think aluminum today," Kloppers said. "When utilization rates are high, we have growth by inducement pricing—think copper today. When demand outstrips supply and inventory levels are low, the industry gets scarcity pricing on oppor- tunity costs—think iron ore at certain points during the last decade." To explain the relevance of these scenarios, he offered two prospective situations for iron ore and copper. "Over the 10 years to 2011, Chinese annualized steel production growth increased at a [compound annual growth rate] of 16%," Kloppers said. "The resulting 800 million mt feed-through overwhelmed the iron ore pro- ducers' ability to respond. Hence, [the market experienced] tight- ness and price setting by scarcity or low quality Chinese product." Kloppers believes Chinese crude steel production will grow to 1.1 billion mt steel by 2025, even though the "steel intensity per unit GDP" will decrease. "If we assume partial displacement of low-grade Chinese ore, there is an opportunity for an additional 650 million mt of iron ore before we reach a peak in demand," Kloppers said. "However, let's be straight, this is a lower rate of growth than we saw in the last decade in both percentage and absolute terms; 650 million mt vs. 800 million mt. While this is a major opportunity for BHP and others, for those that invest in iron ore, they should do so knowing that supply in due course will meet demand. As we do so, we should also remain aware that the pricing mechanisms will change." Longer term (post 2025), Kloppers believes the combination of a plateau in steel use in China and the availability of scrap will likely result in a protracted period of low to negative growth for the seaborne iron ore market. "Lower cost seaborne iron ore will dis- place higher cost supply and prices will revert to marginal cash costs," Kloppers said. "A window of opportunity exists for incum- bent iron ore producers that are low on the cost curve, can lever- age existing development, are quick and close to the market, and have competitive fiscal terms and stability. That's how we will test the economics of our iron investments going forward. Money will only be allocated to this product if it can generate superior returns against that back drop." Copper requires a different set of analysis because resource depletion is such a big issue, Kloppers explained. Also, the type of intensity transition is not as pronounced in copper as the iron ore example in China. The world's major copper ore bodies will show a decline over the next decades. Take that decline into account and add a forecast for underlying growth of 3% per year, the mar- ket should see a 5% increase in growth that copper producers will have to meet, Kloppers explained. "In our base case scenario, prices over that term will be at a level high enough to incentivize investment in supply, which is the second scenario I offered," Kloppers said. "Similarly, we equally expect the incentive prices for commodities, such as potash and natural gas in the U.S., to become increasingly important given the decline in ore body grades or reservoirs over time. "Our strategy remains unchanged over the past decade," Kloppers said. "Our purpose is to create long-term shareholder value through the discovery, acquisition, development and mar- keting of natural resources. We want to own and operate large, 102 E&MJ; • JUNE 2012 www.e-mj.com