Iron Ore Miners Pledge to Keep Pace With Growing Demand From China
By Ida Chen
31 Oct 2007 at 08:24 AM GMT-04:00
resourceinvestor.com
DALIAN (Interfax-China) -- The world's three largest iron ore miners, Brazil-based Companhia Vale do Rio Doce (CVRD) [NYSE:RIO], and Australian-based BHP Billiton [NYSE:BHP] and Rio Tinto [NYSE:RTP] are committed to keeping pace with China's increasing iron ore demand, officials from the companies told Interfax at the 7th China International Steel & Raw Materials Conference 2007, held in Dalian yesterday.
Despite China's campaign to eliminate outdated capacity, the country's steelmaking capacity is set to grow next year, further tightening global iron ore supplies.
The 2008 benchmark iron ore contracted price negotiations are due to kick off between the three international mining giants and Chinese steel mills, led by Shanghai Baoshan Iron and Steel Group (Baosteel), the nation's largest steel mill, in mid to late November this year.
At the end of last year, the negotiations ended with Baosteel settling on a 9.5% rise in iron ore benchmark prices (FOB) for 2007 contracts.
Tight global iron ore supplies have been reflected in surging freight rates and spot prices this year, with the average CIF price of iron ore from Australia, Brazil and India to Chinese ports lifting 25.11%, 41.21% and 71% respectively in the first nine months of this year, compared to the same period last year.
In addition, various investment banks, including Macquarie, Merrill Lynch and Morgan Stanley, recently amended their forecasts for next year's benchmark iron ore term price increase to 50% compared with 2007 prices, on the back of China's growing demand and domestic iron ore shortage.
CVRD to Increase Iron Ore Production 50% by 2012
CVRD is making efforts to boost its annual iron ore capacity by 50% from a current 300 million tonnes to 450 million tonnes by 2012, mainly in order to feed China's ever-growing steel capacity. However, the company will face many possible challenges during the expansion projects, including labor disputes, technological difficulties, environmental issues and infrastructure construction delays, Jose Carlos Martins, CVRD's executive director, said at the conference.
CVRD has pledged to invest a total of $6 billion in iron ore projects over the next five years in order to meet the new output challenge.
Martins predicted that global crude steel production will grow by around 255 million tonnes from 2007 to 2012, with 57% of the increment from China, whose crude steel production is very likely to exceed 500 million tonnes this year.
In order to keep pace with China's growing iron ore requirements, the company intends to enhance its railway and sea freight capacity, and construct four Chinamax-size iron ore transport vessels, each with a capacity of 390,000 tonnes. The vessels will be completed by 2011 at the earliest.
The company is also preparing to set up a number of iron ore distribution centres throughout China, in order to minimize freight rates and better serve domestic steel mills, he said.
Martins further commented that iron ore benchmark prices should be based on supply and demand. "The benchmark system is supposed to bring stability to the market as long as it reflects the market reality. Despite CVRD's premium iron ore quality, its actual value in use has not been recognized so far in the benchmark systems."
BHP Billiton Eyes 300 Million-Tonne Iron Ore Capacity by 2015
China's strong iron ore demand is behind BHP Billiton's intention to nearly double its iron ore capacity from a predicted 155 million tonnes in 2010 to 300 million tonnes in 2015, Ben Williams, vice president and general manager of sales and marketing, carbon steel materials, BHP Billiton China, said.
The company's third-phase expansion project is due to commence operation in the fourth quarter of this year, and will ship its first batch of iron ore by the end of the year.
BHP Billiton has also started working on a fourth-phase expansion project that will contribute an additional 26 million tonnes to its annual iron ore capacity, and is scheduled to complete in the first half of 2010, lifting the company's total iron ore capacity to 155 million tonnes per annum.
The company also intends to inject at least $15 billion into iron ore capacity expansion projects after the fourth phase is completed, Williams said at the conference.
However, BHP Billiton announced today that it is considering setting up an iron ore price index in order to improve the industry's pricing mechanism, prompting a China Iron and Steel Association (CISA) official to voice out that the move is not in the best interests of both parties.
"This is something that we are looking at based on our Western Australian iron ore products, while it is clearly not relevant to this year's negotiations," Emma Meade, BHP Billiton's senior media relations advisor, said in an email statement received by Interfax today.
"The establishment of an iron ore index would represent a quantum leap in improving the industry pricing mechanism for the long term without disrupting the fundamental nature of supply security and relationships," Meade said.
A good price index could help buyers and sellers to have a common view of the market clearing price and could help to facilitate a faster, less stressful and less confrontational process when agreeing to an annual price. This would work well in both a strong and weak market, according to Meade.
Australia was China's single largest iron ore supplier in the January to September period this year, supplying the country with 108.62 million tons, or 38.24 percent of its total iron ore imports over the period, according to statistics released by the General Administration of Customs.
However, an iron ore price index will put iron ore consumers in a more passive position, as it will make the annually contracted pricing mechanism more accurately reflect cash prices.
When reached by Interfax today, Chen Xianwen, the head of the CISA's market research department, commented that "both iron ore miners and steel mills should stick to the existing and well-received pricing mechanism, which better guards the common interests of both parties."
Rio Tinto to Expand Capacity 90% Over Next 10 Years
Rio Tinto intends to expand its iron ore capacity by 90% from a current 220 million tonnes to 420 million tonnes over the next 10 years, general manager of Rio Tinto's China iron ore operations, Hu Shitai, said.
The company plans to increase its iron ore output capacity to 320 million tonnes by 2011, by commissioning between four and six new iron ore mines, and will also construct new port facilities capable of handling an additional 100 million tonnes of iron ore per annum, in order to facilitate iron ore supplies to China, Hu announced at the conference.
Rio Tinto is currently has several joint ventures with Chinese companies in Australia, including the Channar Mine with China's Sinosteel Corp., the Bao-HI Ranges Mine with Baosteel, and the HIsmelt Kwinana Plant with Shoudu Iron and Steel Group (Shougang).
Hu further commented that Rio Tinto's current per-tonne CIF price for iron ore from Australia to Chinese ports is on average $50 per tonne less than the price from Brazil, due to huge difference in freight rates from Australia and Brazil to China.
However, Australian miners have argued that Chinese steel mills and importers are taking advantage of the lower freight costs from Australia, and have requested that Chinese steel pay a shipping premium in order to more accurately reflect the disparity between freight rates from Brazil.
Rio Tinto has been under great pressure from its shareholders recently, who are concerned about iron ore prices and Chinese steel mills taking unfair advantage of the freight rate difference between Brazil and Australia to China, Chen commented after a meeting with Rio Tinto yesterday afternoon in Dalian.
"To fix the freight cost problem, Australian miners should work together with Chinese steel mills to bring down the abnormally high freight costs, instead of shifting from paying the annual FOB contracted benchmark price to paying CIF prices," Chen said.
The last time Australian miners raised the shipping premium issue was during the 2005 contracted benchmark price negotiations, and received the cold shoulder from Chinese steel mills.
© Interfax-China 2007. For more intelligence on Chinese metals and mining, contact David Harman in Hong Kong at david.harman@interfax-news.com or (852) 2537-2262. |
