from a ta, page-9

Iron ore rally makes mockery of the post boom theme with output to hit $100bn

THE iron ore industry is making a mockery of former prime minister Kevin Rudd's election campaign call that the mining boom was over. The boom in iron ore is just working up a full head of steam that could possibly see the industry export an unprecedented $100 billion-plus of the key steelmaking raw material next year.
Ongoing strength in iron ore prices has given rise to fresh confidence that the industry will continue to record strong production growth, with forecasts for a near 50 per cent rise in current annual output to more than 900 million tonnes in the next five years increasingly accepted as likely.

Supply growth in 2014 alone from the Pilbara and lesser operations in Tasmania, the Northern Territory and South Australia, is tipped at 130 million tonnes, carrying annual output to more than 740 million, worth a staggering $103 billion (current price price of $US131.10 and at an exchange rate of US94c). Australia has never seen anything like it before.

To put it in to perspective, exports of iron ore in 2003 were less than 200 million tonnes worth about $5bn. The surge to more than $100bn is a combination of the production growth fuelled by China's seemingly insatiable appetite, and the price rocketing from $US25 a tonne to the $US131.10 quoted yesterday by The Steel Index for 62 per cent iron ore to China.

Analysis of the production plans of the big three in the Pilbara -- Rio Tinto, BHP Billiton and Fortescue -- and those of more than 10 other producers/developers by JPMorgan shows the potential for production to grow to 911 million tonnes by 2018. But as the investment house points out, the forecast strong growth in volumes has implications for future prices.

It said that was the key reason why "many market observers have been bearish towards iron ore prices in the near term".

"We note that Chinese steel production has surprised on the upside, which would help absorb much of this supply growth, with the remainder likely to displace high-cost Chinese domestic supply," JPMorgan said. It sees prices easing back to $US103 in 2016.

Charter rates for the iron ore carriers have moved to 33-month highs recently on a rebuilding of stockpiles in China, the world's biggest steel producer. RBC said yesterday in a note to clients that given the "broadly supportive" market dynamics, it has lifted its 2014 and 2015 iron ore prices by $US10 a tonne to $US120 a tonne and $US110 a tonne respectively.

The upgrade was despite iron ore prices trending down in recent weeks due to the tough market conditions for steel producers and easing Chinese demand ahead of holiday period there. "We expect trading activity to be thin in the short term but we do not expect a price collapse in 2013," RBC said.

Resources industry consultant and forecaster Wood Mackenzie said yesterday that while much of the mining industry was battling reduced margins because of price falls, iron ore stands above the rest.

"Despite pulling back from 2012 levels with a 19 per cent cash margin decline, iron ore still has a very strong average industry margin of $US49 a tonne (52 per cent of average price) in 2014, enabling continued large cash generation in this high volume business," Wood Mackenzie said.

"This supports the on-going focus by the major producers like Rio Tinto, BHP Billiton and (Brazil's) Vale, on pushing ahead with expansions at their low cost iron ore operations.

"It is also in stark contrast to coal and bauxite, both of which have average margins of less than 25 per cent in 2013 -- the outlook is particularly bleak for export thermal coal with an average margin of only 19 per cent in 2014."

During the election campaign Mr Rudd blamed the end of the mining boom, among other things, for the budget deficit. But for the iron ore sector at least -- it is already the biggest export earner and tax payer through corporate tax and royalties -- the boom is not over, assuming prices hold on to these higher levels.

Recent upgrades by some economists that China's GDP could move back over 8 per cent -- and Rio and BHP forecasts of rising steel production there until at 2021 -- has increased confidence among the miners on that score.