i love iron ore

20 Reasons to Love Iron Ore*
Sunday, April 30, 2006
WHY is iron ore so hot? How is it that a sector that previously had a mere handfull of
participants now has dozens of aspirants? Allan Trench ascribes the commodity's success
to its economics – both macro and micro.
Here are 20 reasons to love iron ore, and in particular, Australian iron ore:
(1) The demand side is robust and is enjoying a period of faster-thanaverage
growth rate. You guessed it. China is running hardest with some
commentators suggesting double-digit growth rates ahead. Whilst estimates
vary on the global growth rate, it's hard to find a number below 5% there
either.
(2) Prices are at historical highs – attractive margins have now become
highly attractive margins. Great for industry incumbents. For example, Rio
Tinto's iron ore division contributed $US1.72 billion ($A2.30 billion) to
group-wide earnings in 2005.
(3) Iron ore is one of few commodities to have (nearly) maintained its price in real terms over
several decades.
(4) There is no cut-throat price competition; producers have strong price-bargaining power,
particularly in the seaborne export market. Why else would China attempt to make pricing an issue of
trade-related political economics rather than one of pure microeconomics?
(5) There are more steel companies buying iron ore than there are iron ore companies selling the
product. Work that one out. Who has the upper hand?
(6) Barriers to entry are pretty significant – Just ask Fortescue Metals (or even Cazaly Resources!).
You can enter the gold industry by hiring a 4WD and a metal detector: That won't get you very far in
iron ore. So those highly attractive margins enjoy significant protection against new entrants.
(7) It's a relatively low-technology game – or at least Direct Shipping Ore is. So you won't need a $1
billion autoclave (or four) to extract it. Just dig it up, get it to the port – and throw it on to the first
ship heading north. That means low-technology risk yet high return. That's almost too good to be
true.
(8) As a bulk commodity, infrastructure matters – so governments love iron ore, too, as there are
regional economic benefits that accompany iron ore developments.
(9) Just for good measure, iron ore is needed to build the infrastructure, too.
(10) There are no major substitute products for the main constituent of steel – and steel in its
various forms accounts for close to 100% of iron ore demand. You can tweak the manganese,
vanadium, niobium, chromium and nickel contents but you still need the iron! Major construction
without steel isn't going to happen any time soon.
(11) With the right product, you can even get a price premium. Not surprisingly, it is the deposits
that contain little else but iron that win the day. Significant amounts of alumina, silica, sulphur or
phosphorus results in price penalties.
(12) Price premiums of around 20% are available for lump ore products – that's anything that stays
in one piece above 6 mm.
(13) There are still plenty of resources around the world – meaning that the potential for profits isn't
going away any time soon. Australia has reserves for over 100 years without having broken a sweat.
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The large incumbents have to date managed the supply side in order to avoid price discounting.
(14) Although there are plenty of iron ore resources in the ground, existing supply capacity is flat
out. With brownfields expansions coming cheaper than new mines, producers are seeking out
incremental tonnes at every opportunity.
(15) Grade is king. Higher metal content per tonne is good. So at 65% Fe content you are in clover
(and good money can be made below 60%).
(16) Australia is a world leader in iron ore supply whichever way you cut the data. The Chinese and
Brazilians are actually one and two in the game by annual production, with Australia gaining
prominence by export trade.
(17) The likes of Russia and Canada are a long way behind Australia. It's a three-horse race.
(18) Australia is best placed to serve the growing seaborne markets. Asia is where the demand is.
China, Japan, South Korea and Taiwan make up around 65% of seaborne iron ore demand.
(19) High shipping rates in the current strong commodity cycle accentuate Australia's location
advantage over Brazil.
(20) Australia hosts magnetite iron ore deposits as well as traditional hematite deposits. At around
35% iron, magnetite deposits require concentration before export. Magnetite production is firmly on
the Australian industry radar with equivalent ores mined in Russia and China.
Got any old iron?
* This article was first published by MiningNews.net Premium on April 24. Allan Trench is Adjunct
Professor of Mine Management & Mineral Economics, Western Australian School of Mines and is
a Non-Executive Director of Heron Resources, Pioneer Nickel and Navigator Resources.
Aspermont Limited
Street Address613-619 Wellington Street, Perth WA Australia 6000
Postal Address PO Box 78, Leederville, WA Australia 6902
Head Office Tel +61 8 6263 9100 Head Office Fax +61 8 6263 9148
e-mail [email protected] website www.aspermont.com ABN 66 000 375 048
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