economic fundamentals behind iron ore boom

Hey HC Posters

The basic reason for our record minerals prices, iron ore included, is as follows. Please view the chart below:
It is from an old BHP presentation from 2003 and 2005 makes no difference, this economic principle has been around for over 100 years!

As an economy moves from a poor rural economy it moves into a period of very intensive infrastructure development. Basically moving from a rural based economy growing cotton, wheat, protein based food, rural economy to a more urban economy.

The UK completed this phase of its development in the late 1800s with the advent of steam power and industrialisation, the US in the 1900s, especially after WWII, Japan in the 1960s and S Korea from the mid 1970s. Each time these economies' Per Capita Income grew from less than $2000 to well over $US50,000 where they have plateaud.

When each economy's Per Capita GDP rose from between $3000 to $25000, their rate of consumption of minerals grew exponentially! Please understand this. Look at the chart below, and now look at where China sits in terms of Per Capita GDP. These charts are 7 years old but it is still only at $4500 per capita GDP! Now look at how much steel is consumed as they reach the $25,000 GDP Per Capita! It skyrockets!


Now the last time iron ore nickel copper coal prices rose significantly was when Japan and SKorea had their Per Capita GDP growth! Now what was the population of both countries? 120m for Japan and 70m for SKorea??? Not even the USA comes close with 250m!

How many people live in CHina, 1.4Billion! How many people live in India 1.1Billion!

We have 2.5Billion people about to enter the highest mineral demand period of their economic growth path! AND AT THE SAME TIME!!!

Look at where CHina is on that chart! Little red dot on the LHS near the beginning of the chart! This is going to biggest minerals boom in the world's history! BAR NONE!
This is the same for India, which is around 5-8 years behind China's demand for minerals, as such up until 2010, they have been happy to dig up their iron ore and ship it to China! But now, as they move into the more intensive phase of GDP Per Capita, they are starting to need more and more of it for domestic use, hence the increase in iron ore export taxes, Kanatarka's export ban mid last year which led to a $40-50 per tonne price rise and this week's announcement that Orissa is planning on going down the same route.

India supplies approx 110mtpa of sea borne Iron ore, mainly to China, this has fallen to 80mtpa after the Kanatarka export ban and if Orissa is successful, and it should be noted that it still might fail to achieve this in its first attempt. It took Kanatarka two or three goes to get their provincial govt to approve the ban! Either way, all the roads lead to the same outcome, a significant reduction in iron ore supplies, while demand for iron ore is growing significantly in China.

Within 5 years we will see India become a net importer of iron ore and rather than supply China with iron ore, it will compete for iron ore from Australia, Brazil and soon to be Africa :)

Even if India didnt ban their iron ore exports, the rate at which China will be screaming for iron ore over the next 10 to 20 years will far outweigh supply!



Why is an economy's mineral consumption so strong during this period of its economic development? Because as an economy moves from a poor rural based on to an urbanised wealthy nation they need private dwelling construction, commercial construction, thousands of kms of rail, roads, ports etc! For China this has just begun, they have around 300m in urban areas, there is another 1.1Billion to go! The next stage from $20,000 to $40,000 is consumption! We are starting to see how big this economy will be where they are already selling more new cars each year than the USA! By 2012 they will sell twice as many new autos than the USA! In 2010 China sold 18m new autos, while the US sold 14.5m! India 13m! The CHinese auto market grew by 32% in 2010 from 2009. If it grows again by 32% which it should come close, it should hit around 24m new autos! This will be almost twice the US which should struggle to get to 14m again without any additional stimulus measures! Now each car that weighs 1tonne needs 1.5tonnes of iron ore, 500kgs of coal, 20kg of copper 10kg of nickel and zinc and 200kg of aluminium(as an average)!
Adding to this is the quality of CHina's iron ore is deteriorating considerably. As per a RIO Tinto presentation in mid 2010, their cash cost to dig up their iron ore is at approx $150 per tonne! The best quality iron ore is sitting at a sickeningly low 30% and their older mines is at 12%!
Compare that to our 63+% in the Pilbara or Sundance's 61% Pure DSO hematite ore that costs us $19-22 per tonne to dig up!
Sundance Resource's Mbalam and Nebeba project along with the rail and port project isn't a nice to have for the Chinese, ITS A NEED TO HAVE!!! They need us as much as we need them, and Mr Jones and his management team knows this, as they negotiate the off takes and finance!

Sundance's future is very bright, we have the management with the expertise, Mr Jones was a banker who used to sit on the other side of the fence approving lending for Australian mining companies for 15 years before he jumped over the other side! he knows exactly what information/analysis these Finance Companies are looking for to invest in Sundance.

I hope this helps to explain a bit why I am so excited about this company and Australia in general!

We are headed for a very exciting period in Australia's history. What is important that people get on board with companies like Sundance Resources for the long term!

Again DYOR, but I hope I have helped a little bit!

Anyone have any queries or thoughts on this post, pls let me know, I look forward to this sort of discussion.

Cheers Nectar