China boosts iron market

www.theaustralian.news.com.au By Robin Bromby February 03, 2003

RIO Tinto and BHP Billiton are certain this year to win back most of the iron ore price concessions they made to European and Japanese steel mills in 2002, thanks to booming demand from China, according to a report.

Sydney-based AME Mineral Economics said last night the iron ore sector was gearing up for boom times in 2003 while most of the rest of the business world was gripped by trepidation.

China's thriving steel industry was driving unprecedented levels of demand for iron ore in international markets.

That country's iron ore imports in 2002 smashed the previous year's record of 92 million tonnes, coming in at about 112 million tonnes. This year, China would import close to 130 million tonnes, surpassing Japan and becoming the world's top importer of iron ore.

AME expects Japanese and European steel makers to agree to price rises between 2 per cent and 3 per cent in 2003 after forcing through a 2.4 per cent reduction last year.

Producers were expected to start the negotiations by asking for a price increase of between 5 and 10 per cent.

"While the tight supply situation might support a rise of this magnitude, the increasingly consolidated steel majors in Japan and Europe, with an eye on their uncertain bottom lines, are unlikely to agree," the report said.

Rio, BHP and Brazil's CVRD are the world's three big iron ore producers. AME said the scale of Chinese demand would force the pace on new projects, as well as on mine expansions in the pipeline such as BHP's Mining Area C, Rio's West Angelas and CVRD's capacity upgrades in Brazil.

These companies between them control 70 per cent of the world seaborne trade. They have also slashed costs over two years by 13 per cent by using their size to impose labour force rationalisation. The growing ownership concentration opened the doors to reducing overheads, saving back office costs, and exploiting operating synergies.

These three companies had, since 1998, expanded their production by 40 per cent. In the longer term, the iron ore industry was facing some big mining problems.

AME said these included ever deepening mines, having to pull out growing percentages of waste material to extract the ore, longer hauling distances and the depletion of higher grade ores.

Ore transport and port costs continued to burden the producers.

In 2002 transport and port expenses alone made up 52 per cent of the cost of getting the ore into the holds of ships - compared to the mining process's 21 per cent.

Australia ranked as 2002's lowest cost producer, mainly due to removal of restrictive labour practices.