The Iron Ore Market

The iron ore boom continues unabated. Price negotiations in 2008 have been exceptionally drawn out and were not fully concluded at the time of writing. The price increases agreed so far vary between 65% and 87 % and are the highest ever. The final outcome for Australian producers will probably be higher still. The first benchmark deal in 2008 was struck by Vale (CVRD) with a Japanese and a Korean steel company. The Chinese have not yet completed the negotiations. The issue of a premium for Australian producers to reflect the difference in freight costs between Australia and Brazil for deliveries to China has proved to be a contentious issue.

World use of finished steel products increased by 6.6 % in 2007 to 1,202 Mt. With the exception of NAFTA, where steel use decreased by 9.1 %, all parts of the world experienced strong growth in steel demand. The increase was particularly large in China where steel demand rose by 13 %, and in the Middle East, where it increased by almost the same amount. World crude steel production increased from 1,251 Mt in 2006 to 1,344 Mt in 2007, an increase of 7.5 %. Production in China increased by 16 % and China now accounts for a little more than a third of world production. All regions, except Africa, experienced rises in production. China, which became a net steel exporter only in 2005, accounted for 21 % of world steel exports in 2007.

International iron ore trade also reached a new record level in 2007 as exports increased for the sixth year in a row and reached 822.4 Mt, up 8.1 %. These figures include all export trade including intra-CIS trade. Brazil is now the leading exporter at 269 Mt overtaking Australia with a few million tons in spite of a falling growth rate. Indian exports grew for the seventh consecutive year and at 94 Mt the country is the third most important exporter clearly ahead of South Africa, Canada and Russia with exports between 25 and 30 Mt each. China was of course the most important importing country, accounting for 383 Mt, or 46 % of world iron ore imports.

The three largest companies, Vale (CVRD), Rio Tinto and BHP Billiton, together control 35 per cent of the global market. The level of concentration has thus been more or less constant during the last couple of years. The "Big Three" have not managed to increase their production quite as fast as total world production, mainly because of a rapid expansion by small producers in India and China and during 2007 also by newcomers in Australia. But the concentration of the iron ore industry might increase dramatically in 2008 if BHP Billiton's bid for Rio Tinto were to succeed. The bid, which is valued at around 150 billion US dollars, is the largest ever in the history of mining.

New iron ore mining capacity taken into operation in 2007 reached almost 130 Mt globally. This is a considerably higher figure than in 2006 when 70 Mt of new capacity was registered or in 2005 when only 30-40 Mt was reported. The total project pipeline contains more than 600 Mt of new production capacity that will come on stream between 2008 and 2010. 44 % of the projects are in South America, 37 % in Oceania and the rest are more or less evenly distributed over the remaining continents. Several projects have been announced in Africa and it seems that West Africa's reappearance as an iron ore producing region is only a matter of time.