Summary
Beyond the headlines of more natural resources tie ups by China, additional pressure is coming on their own internal iron ore production due to declining grades, high stripping ratios, higher average and marginal costs across many fragmented less efficient mining operations and a greater percentage of mine expansions going underground. More deals with external suppliers are expected in order to feed steel growth and particularly to make up for the future erosion of their own ore output.
Analysis
A few pertinent facts about China's own internal supplies of iron ore makes clear that it is not only the need to feed growing steel demand that is putting pressure for much higher imports and thus their increasing number of tie ups with major external ore suppliers to ensure long term supplies.
China produces about 21% of global iron ore supply and their imports have been growing at 13% year over year. Seaborne iron ore trade, now 50% driven by China, has been growing annually at 10% versus 8.7% for total global iron ore supply. China's internal output comes from many fragmented mining operations with the top five producers comprising only 17% of total domestic production.
China's major import sources are Australia, Brazil and India. Australia's Pilbara has not matched infrastructure capacity with demand growth and its share of Chinese imports has actually fallen substantially from 1989 when it stood at 70%, to under 40% of total imports today. Brazil, India and some others have been making up this difference. However of late, India's rising steel production and export tax on higher grade ores (62 - 63% Fe) are pressuring ore exports to China.
In fact China's internal output potential may be approaching a peak due to the following:
- Internal mine ore grades are falling - from an average 40% in 2002 to 25 - 30% today.
- Their mine stripping ratios are running at 9X versus 1X in Brazil.
- Half their mine expansions are now going underground raising the costs, which on average have increased 70% since 2003.
- Marginal costs are up to $80 - 85 per ton, versus the major global seaborne suppliers at around $20 per ton.
Given the ongoing growth in steel demand to support infrastructure development and the declining share of internal supply, we will expect to see ever more pressures for China to reach out to take more equity stakes in new and emerging suppliers, like it has been doing in Aquila, Fortescue, and others in order to feed its growth and fight the inevitable decline of its own iron ore production capacity and ever higher cost supply.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
