brazil to double iron ore output, page-3

Felicity Williams

May 21, 2008 12:00am
IRON ore rival Brazil has challenged Australia, unveiling a $US27 billion plan to nearly double production of the steel-making ingredient amid surging Chinese demand.

Paulo Camillo Penna, president of the Brazilian mining institute Ibram, said the investment would increase the nation's annual iron ore output to 650 million tonnes from 350 million tonnes over the next four years.

That compares with Australian iron ore output of about 290 million tonnes this financial year and projected production of 489 million tonnes in 2012-13.

Vale - the world's second-largest miner after BHP Billiton and the biggest iron ore producer - is expected to account for about 450 million tonnes of Brazil's forecast iron ore production in 2012.

The news marks an escalation in the already fierce rivalry between Australian and Brazilian iron ore producers, as both parties compete for a bigger share of the all-important Chinese market.

China has driven six consecutive years of growth in global iron ore demand, thanks to rising steel production fuelled by the rapid urbanisation of its 1.3 billion citizens.

And the emerging economic giant is expected to account for some 60 per cent of growth in global steel consumption, as it balloons to 1.8 billion tonnes annually by 2013.

Vale has already negotiated a 65 to 71 per cent price increase with its Asian and European customers in this year's iron ore contract price negotiations.

But BHP and Rio Tinto remain locked in discussions with Chinese steel mills, as they push for iron ore contract prices to reflect the cheaper cost of shipping the raw material to China from Australia compared with Brazil.

The Anglo-Australian mining giants are holding out for a price increase of at least 80 per cent this year, even though their Chinese customers have threatened to boycott Australian iron ore if an agreement is not reached by the June 30 deadline.

It costs a Chinese steel mill just under $US100 to import a tonne of iron ore from Brazil at current shipping rates, compared with about $US37.50 from Australia.

Shanghai Securities News reported yesterday that Beijing planned to reduce the huge iron ore stockpiles at Chinese ports in a bid to curb soaring freight rates.

The newspaper quoted unnamed sources as saying that the move should also help break China's deadlock with BHP and Rio.

Analysts expect BHP and Rio to secure a partial freight premium for Australian iron ore this year, with most speculation in the range of $US10 to $US15 a tonne.

BHP has also launched a $160 billion takeover bid for Rio, citing cost savings by combining the two miners' operations in the Pilbara.

Meanwhile, Rio has unveiled plans to ramp up Pilbara iron ore production from about 200 million tonnes a year to 320 million tonnes by 2013, as part of its defence against BHP's unwanted advances.

BHP shares fell 94 to $48.61. Rio shares dropped $1.10 to $155.