DJ LME WEEK: London Mining Bets On More Demand For Iron Pellets09/10/2011 05:01AM AEST
By Alex MacDonald
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--U.K.-listed iron ore developer London Mining PLC (LOND.LN), betting on the fact that steelmakers are becoming more discerning consumers of iron ore, may build one or two pellet plants to meet an anticipated increase in demand for the high-quality ingredient, the company's chief executive told Dow Jones Newswires.
"The market is moving to more and more pellet feed and less and less lump [ore]," Graeme Hossie said in an interview during the London Metal Exchange week. "What steelmakers really want now is a supply of high-quality pellets. The forecast is that in the next 10 to 15 years, over 35% of iron ore production will be pellet feed."
Iron ore comes in various grades and shapes. Lump is typically the most popular product because it can be scooped out of the ground and shipped to a customer without the need to process or beneficiate the ore into a higher-quality product. High-quality lump, however, is in short supply. As a result, demand has grown for pellets, a processed iron ore product that emulates lump.
The question now is who will invest the money needed to meet that demand, the miner or the steelmaker? In China, steelmakers have built pellet plants adjacent to their steel plants. In Brazil, steelmakers have set up a joint venture with iron ore miner Vale SA (VALE) while in other locations miners invest in both the mining and pelletizing process. There's even scope for a stand-alone iron ore pelletizing business to emerge, Hossie said.
"Is it going to be the steelmakers or the miners who make the investment? Probably the steelmakers are going to say, 'Miner, we want to buy pellets so make the pellets. You've got the margins and the capital, so give us what we need,'" he said.
On average, miners tend to generate higher profit margins than steelmakers because mining tends to be less capital intensive than steelmaking. As a result, mining companies tend to, in times of high commodity prices, aggregate a greater pool of capital that can be used to invest in pellet plants.
Hossie forecasts that billions upon billions of dollars will be spent over the next few years to build pellet plants.
The key determinant in the investment decision is cheap energy, according to London Mining.
"It makes sense [for London Mining] to pelletize in Saudi Arabia where energy is cheap. It doesn't make sense where energy is high unless there are some other advantages," Hossie said. London Mining is currently planning to construct a 5 million-ton-a-year pellet plant at a Saudi Arabian iron ore project. It is also considering building a pellet plant in Iceland due to the abundance of cheap geothermal power there.
When asked if he saw scope for iron ore miners to move downstream in steelmaking, Hossie said it was unlikely.
"First of all, there are good returns and big margins in mining. In a certain sense, mining is also a simpler business and has a different capital requirement and different marketing approach towards customers, types of products, and complexities. In general I don't think miners will go into steelmaking."
However, he noted that some governments have placed pressure on miners to generate more value from the minerals they mine. In Brazil, for instance, the government has encouraged majority-state owned Vale, the world's largest iron ore producer, to invest in steel plants.
"Sometimes there is pressure from governments saying they want more beneficiation in the country…but you need to make sure it's economic because steelmakers' margins don't have the same dynamics as iron ore or coking coal producers. You want deep pockets, it's capital intensive," he said.
He noted that from a steelmaker's point of view it makes sense to move into mining as a way to lower raw material costs. In exceptional circumstances, where both energy is cheap and iron ore has the right specifications, companies have been known to invest in the pig iron production, or the first stage of steelmaking, Hossie said
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