Running discussion on SP, page-9331

I’d disagree on your assertion that the profits of BHP and RIO were not effected by Chinese iron ore production. When the price of iron was peaking the western analysts and economists were singing in chorus about the demand for iron ore being structural and none where worried about Chinese mine supply because as you said most Chinese mines are lower grade magnetite (20-30% Fe from memory versus Pilbara grades of 58-65%). The arguments from analysts and economists in government treasury departments in Australia and Western Australia, who were modelling the iron ore demand to make forward estimates for state and Federal budgets was the iron price would remain above about $110/t because that represented the marginal cost of production of Chinese iron ore production. ie a lower price would cause Chinese mines to become unprofitable and close. Unfortunately for Australia and the Australian iron ore producers this assumption proved to be false because Chinese steel production which relies about 50% (from memory) from domestic iron ore mine production is not operated for commercial interests like many other things in China (think ghost cities). Chinese domestic iron ore production is strategic for China because many regional steel mills depend on the local mine supply along with the livelyhoods of all the people who depend on the local vertically integrated mining-steel production. There is another very important reason why the Chinese will maintain their local iron ore production despite it being a loss making industry, which our clever treasury analysts in Canberra and WA overlooked. Chinese iron ore is a military strategic industry. If the Chinese shut down their domestic iron ore production they would be totally reliant on seaborne supplies. No self respecting super power would put themselves in this position as steel is the driver of the war machine if and when it ever should come. Let’s hope we never go there. With the US’s naval supremacy a naval blockade of raw materials entering China would bring China to its knees. That is why China will maintain domestic production of all strategic minerals no matter the commercial costs.

As to why this discusion is happening on the AVZ threads, it’s because the discusion was about whether AVZ’s deposit could become stranded and whether vertical integration including down stream processing in the DRC would be likely to happen. In my opinion the deposit could become stranded based on the previous argument I made about the Chinese wanting to put their feet on future mine suppply but not necessarily wanting to develop it immediately. This doesn’t mean the deposit won’t be sold to the Chinese. I just don’t see them developing it on a large scale any time soon. As far as vertical integration goes in the DRC I doubt the the Chinese will not see the sovereign risks as a barrier to downstream investments. They do not control the security situation in the DRC, the UN does, hence their investments in downstream processing in more stable jurisdictions like Australia. From a personal point of view, being a West Australian, I don’t want the downstream lithium refineries in my state, they are dirty and belong in China. The Chinese and others have convinced our stupid local politicians here to let this dirty white elephant industry into our state. All the politicians see is the feel good story about new jobs. Once the lithium concentrate price dynamics play out the Chinese will be getting our mine product cheap and leaving their waste in our backyard. Smart cookies.Esh