Engineering & Mining Journal

NOV 2017

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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IRON ORE REPORT NOVEMBER 2017 • E&MJ 35 www.e-mj.com average iron ore price 62% Fe CFR China of $72/mt so far for 2017, the iron ore market has seen quite a rebound from the $58/mt during 2016 and the $56/mt in 2015. There are several reasons for this mar- ket change, higher than expected steel production and GDP growth in China are certainly important ones. But there are also others with long-term effects, such as the increasing demand for better quality iron ore needed to produce cost-efficient high-quality steel products. Another is the increasing volumes of mid- and low-quality iron ores mined and concomitant relatively lowered supply of high-quality products. These are tendencies observed all over the world, but they are particularly important in China where the need to reduce environ- mental problems and waste of energy, as well as improve low productivity, which are some of the effects of low-quality ores, is a top priority. This has led to an increased demand for high-quality iron ores with Fe content above 65%. Consequently, the price spread between low quality iron ores (less than 58% Fe) and the 62% Fe stan- dard product on the one hand and high quality (greater than 65% Fe) and the 62% Fe standard have increased. The discount for 58% Fe iron ore price and the 62% Fe iron ore was around $30/mt at the end of 2016 compared to $8/mt early in the year. The premium paid for qualities above 65% Fe has gradually increased during the last couple of years. It is substantial, in some periods it has been reaching 50% on top of the 62% Fe index price. The development of three distinct- ly different markets for iron ores, below 58% Fe, around 62% Fe and one for highest quality products (above 65% Fe) seems to be well under way. It will be more important to clarify which quality is being referred to, when giving an iron ore price in the future. It is also important to consider whereto the iron ore is sold as the index includes transport to China and hence if there is a shorter transport involved the price paid will be affected. Corporate Concentration Corporate concentration in the iron ore in- dustry continued to increase in 2016 as in both 2014 and 2015. The earlier trend of decreasing concentration, due to swift production increases by many small- and medium-sized producers not using their full capacity, during the 2005-2008 pe- riod, was reversed in 2009. At that time, the major producers got their large expan- sion programs up and running. Since then, industry concentration has increased steadily, and in 2016, the 10 largest producers accounted for 62.3% of total production (61.8% in 2015). The "Big 3" iron ore mining companies (Vale, BHP and Rio Tinto) have also steadily in- creased their control over total world iron ore production from 42.1% in 2015 to 42.6% in 2016. Vale, the Brazilian mining company, remains the world's largest iron ore pro- ducer, with 349 million mt of iron ore pro- duction in 2016, up from 346 million mt in 2015, a new all-time high. All of Vale's mines are located in Brazil and its market share rose from 16.5% in 2015 to 16.6% in 2016. This is down from its peak share of 18.8% in 2007. Rio Tinto has been the third largest producer since 2013, when it was overtaken by BHP Billiton (now BHP). However, in 2016, Rio regained second place. It produced 281.3 million mt in 2016 and thus controls a market share of 13.4%. Rio Tinto has most of its mines in the Pilbara region in Western Australia, and in addition controls the Iron Ore Co. of Canada (IOC) with mines in Labrador. BHP slipped down to a market share of 12.5% in 2016 (13.1% in 2015). BHP's controlled production in 2016 was 262 million mt compared to 274 million mt in 2015. The production stop at Samarco due to the dam failure catastrophe, is the sole reason for this. Except for the Samar- co joint venture with Vale in Brazil, all of BHP's mines are in Western Australia. However, the measurement of corporate control at the production stage underes- timates the real concentration of the iron ore sector, especially by the three largest companies. Large portions of total output do not enter the market, but are produced at captive mines or mines which have a protected or restricted market. The corpo- rate concentration if measured by the share of the major companies in global seaborne trade, is considerably higher. Vale alone controls almost 24% of the total world market for seaborne iron ore trade, and the three largest companies in 2016 controlled 61.1%, a decrease from 64.4% in 2015. Corporate concentration will likely con- tinue to increase in the current low-price environment. As most unprofitable mines have already closed, further increases of concentration will depend on the contin- ued expansion plans of the "Big 3" and possibly the Australian miner Roy Hill con- trolled by Hancock Prospecting Pty Ltd. Project Pipeline In 2016, global production of iron ore rose by 80 million mt. Most of this ton - nage came from Australia and Brazil where large-scale project ramp-ups took place. But there was also signs of in- creased production elsewhere because of rising iron ore prices. In India, the relaxed export restrictions for iron ore led to the reopening of mines and production grew. UNCTAD, in its report "The Iron Ore Market 2017," forecasts the annual sup- ply to grow by a little less than 200 mil- lion mt between the years 2017-2020. Further, the "Big 3," could add as much as 60 million mt in capacity during 2017. Vale is continuing its ramp up of pro- duction at the S11D mine in the Carajas. Iron ore from Vale's new S11D project is loaded at the Ponta da Madeira Maritime Terminal (January 2017).

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