Industry Trend Analysis - Iron Ore: Growth At A Standstill - OCT 2017


BMI View : Global iron ore production will grow modestly due to mine restarts and expansions in Brazil and India which will boost production. Meanwhile, output growth in China will decline on the back of falling ore grades and high costs of production.

Global iron ore production will grow modestly from 3,091mn tonnes (mnt) in 2017 to 3,299mnt by 2021. This represents average annual growth of 1.0% during 2017-2021, which is identical to the average growth during 2012-2016. On the one hand, supply growth will be primarily driven by India where mine restarts in the state of Goa will boost production and Brazil where major miner Vale is set to expand output with its new mine. On the other hand, miners in China, which operate at the higher end of the iron ore cost curve, will be forced to cut output due to falling ore grades.

Output Growth To Grind To A Halt
Global - Iron Ore Mine Production (mnt) & Growth y-o-y (%)
f = BMI forecast. Source: USGS, BMI

Australia

Australian iron ore production will slow with the exit of junior high-cost miners, as major players ramp up production. Major miners will increasingly focus on cost-cutting, while a weaker Australian dollar further aids their pipeline of expansion projects. Declining production costs will keep major miners' strategy of increasing output to reap economies of scale economically sustainable. For instance, Rio Tinto and BHP Bil li ton now respectively boast cash costs of USD14.30 and USD15.00 per tonne of iron ore, respectively, due to intensive cost-cutting efforts.

Rio To Remain Outperformer In Terms Of Efficiency
Select Iron Ore Miners - Iron Ore Production (mn tonnes) & EBITDA per metric tonne (USD)
Source: Bloomberg, BMI

We forecast iron ore production in Australia to register average annual growth of 0.4% during 2017-2021 compared to 12.4% during 2012-2016.This is due to mothballing of mines from junior miners as iron ore prices remain historically weak as we believe that majors will stick to their production growth targets to crowd out high-cost producers.

Beyond 2017, iron ore production will start to slow from 3.8% in 2017 to -3.0% in 2021 on the back of low prices. We expect Australia to remain the top global producer of iron ore, with production decreasing from 897 million tonnes (mnt) in 2017 to 881mnt by 2021. Australia's share of global output will average 28.6% during this period.

Majors To Ramp Up Output
Select Companies - Iron Ore Mine Production (mnt) & Average Growth
Source: Bloomberg, BMI

Brazil

Brazil's iron ore production growth will remain strong in the coming years, due to low operating costs and a solid project pipeline. We forecast Brazil's iron ore production to increase from 420 million tonnes (mnt) in 2017 to 526mnt by 2021, averaging 6.1% annual growth. Brazil's top iron ore miner, Vale, will drive production growth with the low-cost S11D project. In Q117, Vale reported record iron ore production of 86.2 million tonnes (mnt), due to the ramp up at the S11D and Itabiritos projects. The firm remains on track to produce 360-380mnt of iron ore in 2017, which would account for over 80% of Brazil's total output. Vale projects cash costs as low as USD7.7/tonne at theS11D mine, due to integrated logistics and high-quality ore.

Other foreign and domestic firms will continue advancing Brazilian iron ore projects. Of Brazil's 32 new projects in our BMI Mines Database, 14 are iron ore projects. Anglo American's USD8.8bn Minas Rio project reached commercial production in 2016 and has an operational capacity of 26.5mnt per annum. The mine is expected to remain operational for 28 years. However, Minas Rio will remain at high risk of sale or closure following Anglo's restructuring plan.

Domestic steel makers Companhia Siderurgica Nacional and Usiminas looking to integrate upstream mining into their operations will face project delays due to weak prices. For instance, in 2015, Australian listed Centaurus Metals, which holds a number of undeveloped iron ore deposits in Brazil, decided to refocus its business away from bulk commodities due to prohibitive up-front costs and a weak price environment.

Majors To Ramp Up Share
Select Countries - Share Of Global Iron Ore Mine Production (%)
f = BMI forecast. Source: USGS, BMI

China

China's iron ore sector will see more mine closures as historically low iron ore prices will price out high-cost domestic miners despite the temporary rally. Import growth will increase in the coming quarters as steel production remains strong on fiscal support to the construction and infrastructure sectors. We forecast Chinese iron ore production will decline 5.0% and 3.0% in 2017 and 2018, respectively. Chinese iron ore output will average an annual contraction of 1.6% during 2017-2021 on the back of historically low iron ore prices and weak steel consumption growth. In addition, a rising environmental regulatory burden will reduce demand from steel mills for low-grade iron ore. This will limit domestic output, as Chinese ore grades declined from 66% in 2004 to 17% in 2014.

Iron ore inventories in China rose to an all-time high of 131.8 million tonnes in June 2017. China's fiscal stimulus cooling will cool steel production, reducing demand and thus prices of iron ore by 2018. As such, China will lose iron ore market share both to Australia and Brazil due to the sector's high production costs. According to Bloomberg Intelligence, around 70% of Chinese iron ore output is uneconomical at prices below USD96/tonne. In particular, miners operating in provinces including Hebei, Fujian, Guangdong and Xinjiang will take the strain of lower prices due to their sitting at the highest-end of the iron ore cost curve. With the steep fall in prices, many of these small firms exited the market in 2014, with only 60% of iron ore firms remaining in production. Given that the average price of iron ore production in China is RMB520/tonne (USD83.6), vastly above our forecast for seaborne prices, we expect more mine closures in the coming quarters.

Brazil & India To Defy Slowdown
Select Countries - Average Annual Iron Ore Mine Production Growth (%)
Source: USGS, BMI

India

India's iron ore output growth will be supported by the removal of export taxes in the Union Budget for low-grade ores and the country's Mines & Minerals (Development & Regulation) (MMDR) Act, which will streamline licensing and reopen closed mines. Although the MMDR Act will support ore output growth, the royalties included in the Act will limit the sector's overall growth potential. As part of India's 2016 Union Budget, export duties for iron ore lumps and fines below 58% Fe content were reduced to nil from 30% and 10% respectively, which will significantly aid Goan shipments to recover as miners remain burdened by local levies and low prices. This reduction was aimed at boosting shipments from the western state of Goa where the Supreme Court lifted an earlier iron ore mining ban.

We forecast India's iron ore output to grow from 185 million tonnes (mnt) in 2017 to 221mnt in 2021. This represents an average annual growth of 6.6% during 2017-2021, higher than the average contraction of 5.0% y-o-y over 2012-2016 following mining bans in the three largest iron-ore producing states of Goa, Odisha and Karnataka which have since been lifted.

Growth To Be Strong
India - Iron Ore Production (mnt) & Growth y-o-y (%)
e/f= BMI estimate/forecast. Source = USGS, BMI
Select Countries - Major New Iron Ore Projects
Country Mine Mine Type Phase Primary Company Secondary Company Total Allocation CAPEX (USDmn) Notes
Source: BMI Mine Projects Database, Company announcements
Brazil Carajas Serra Sul Open Pit New Project Vale (100%) - 8,039 February 2016 - Vale has started testing equipment at the Carajas Serra Sul S11D Iron project, with production ramp up beginning in H216; The Carajas complex includes Northern Mining System - Serra Norte, Serra Sul and Serra Leste ((N4W, N4E and N5); First production is expected for H216; Production capacity - 90mnt/yr
Australia West Pilbara Open Pit New Project Baosteel (50%) POSCO (24.5%), AMCI Group (25.5%) 5,700 December 2015 - Partners have halted work on the feasibility study on the project in light of the slump in iron prices; Proved and Probable Reserves -780mnt; Projected production rate of 40mnt/yr
Cameroon Mbalam-Nabeba Open Pit New Project Sundance Resources (100%) - 4,700 Mine will commence production in 2018 with an estimated annual production of 40mnt/yr in the initial 12 years; Reserves - 436.3mnt
Congo-Brazzaville Zanaga Open Pit New Project Zanaga Iron Ore Company (49%) Glencore (51%) 4,700 May 2014 - ZIOC released the results of the Feasibility Study, which confirm attractive project economics of a staged development approach. Stage One consists of a 12mntpa operation, with Stage Two expanding the operation by 18mntpa to produce a total 30mntpa of iron ore over a 30 year mine life. Production is slated for 2016-2017; Reserves: 2,070mnt
Australia Central Eyre (Warramboo) Open Pit New Project Iron Road Limited (100%) - 4,000 Reserves - 3.7bn tonnes; The optimisation study was undertaken in July 2015, with the aim of increasing production from 21.5mnt/yr to 24mnt/yr
Liberia Putu Open Pit New Project Severstal (100%) - 3,500 April 2015 - Severstal has said that it will be unable to bring the project online, if it does not get a partner; Estimated resources - 4.4bn tonnes; Production to start in 2017-2018, Potential output - 20 - 30mnt/yr of concentrate
Canada Duncan Lake Open Pit New Project Century Iron Mines (65%) Augyva Mining Resources (35%) 3,043 Estimated production - 41mnt/yr; Measured and Indicated Resources - 1,050.5mnt
Brazil Pedra de Ferro Open Pit New Project Eurasian Resources Group (100%) - 3,000 June 2014 - Bahia Mineracao (Bamin) has granted the operating licence for the project; Estimated production 20mnt/yr with an average grade of 66-68% iron; Reserves - 470.5mnt
China Sijiaying Open Pit Expansion Hebei Iron & Steel Co Ltd (100%) - 2,980 August 2013 - Ministry of Land and Resources approved feasibility on expansion of the mine; The expansion project is designed to produce 5mnt of concentrates; Estimated Reserves - 2.2bn tonnes
Canada Hopes Advance (Nunavik) Open Pit New Project Oceanic Iron Ore Corporation (100%) - 2,850 Proven reserves - 763.3mnt; Estimated production - 10-20mnt/yr; Expected start date - 2017
Brazil Jiboia Open Pit New Project Mineracao Minas Bahia - MIBA (100%) - 2,600 Estimated production - 25mnt/yr
United States Minnesota Open Pit New Project Essar Steel (100%) - 1,900 Company anticipates production in Q215, with full production in Q116
Saudi Arabia Wadi Sawawin Open Pit New Project London Mining (25%) - 1,900 Reserves - 248mnt; Construction expected to commence in 2013 and first production in Q415
Australia Weld Range Open Pit New Project Sinosteel (100%) - 1,713 SMC is aiming to further develop the resource base through exploration and to operate at 15mnt/yr for at least 15 years
Chile Santo Domingo Open Pit New Project Capstone Mining (70%) Korea Resources (30%) 1,700 September 2015 - Capstone has suspended development at the project; will maintain the project for future development when conditions improve; Proved Reserves - 65.3mnt; Expected annual output of 3.3mnt of iron ore
Peru Pampa de Pongo Open Pit New Project Nanjinzhao Group (100%) - 1,500 The mine is estimated to produce 22.5mnt/yr; Production expected to start in late 2016; The first phase of production at 10-11mn/yr of iron, which in turn could be expanded to between 20-22mnt/yr at a later stage; The current design of the project gives an estimated lifetime of 30 years
Canada Kami Open Pit New Project Alderon Iron Ore Corp. (75%) Hebei Iron & Steel Co Ltd (25%) 1,270 Estimated production - 8mnt/yr of concentrate at a grade of 65.2% iron and could be expanded to 16mnt/yr; Total Measured and Indicated Resources - 1,274.5mnt