Interpac Business and Migration Solutions Melbourne Australia

November 20, 2009

Update A bonanza in new iron ore mining projects may herald lower prices in coming years as capacity begins to catch up with rising Asian demand, according to a long-time industry watcher.

Fat Prophets resource analyst Nick Raffan said he sees parallels between the current flurry of investment in new and expanded mines aimed at satisfying China's iron ore hunger and the rush to meet Japanese coal orders in the late 1970s from new mines in Queensland, the Hunter Valley in NSW and elsewhere.

The latter surge led to an over-supply and subsequent price slump for the energy source that lasted decades.

''Traditionally, miners have never been able to stop themselves eventually from over-producing,'' said Mr Raffan. ''It's in their nature.''

Australia remains dependent on commodities for more than half its exports, with shipments to China of iron-ore and related concentrates alone worth $22.1 billion in 2008-09, according to the Department of Foreign Affairs and Trade. Apart from helping to narrow Australia's trade gap, rising commodity prices and volumes bolster state and federal coffers.

In volume terms, Australia exported 323.3 million metric tonnes of iron ore and pellets to China in 2008-09, according to the Australian Bureau of Agricultural and Resource Economics.

Expansion under way

While Mr Raffan acknowledges the strength of the current up-swing in iron ore as Asian economies - particularly China's - rebound from last year's slump, he says there is a risk miners in Australia and elsewhere are increasing production too quickly.

As of October, investments in Australia to expand or develop resources totalled $112.5 billion, ABARE numbers said this week. Iron ore mining or infrastructure capex projects accounted for about 15 per cent of that total, with nearly 40 additional projects under consideration.

Nor is Australia alone in undertaking large investments to expand capacity. Vale, the Brazilian competitor to BHP Billiton and Rio Tinto, said last month it will spend $US12.9 billion ($14 billion) to raise production and exports, including funding two new iron ore mines.

Bloomberg reports Vale expects to export 140 million tons of iron ore to China this year.

Meanwhile China, which is producing about half the world's steel, is investing in mining capacity of its own. Projects include mines in Australia, Africa and South America.

Mr Raffan doesn't think the additional Brazil's output, nor China's own investments, is on the minds of local resource project developers.

''I think everyone sees things through rose-coloured glasses at the moment," he said.

Sky-high hopes

BHP Billiton's chief executive officer Marius Kloppers reiterated his company's confidence in China's demand for resources holding up.

In a speech this week to the Lowy Institute, Mr Kloppers said China would build 50,000 skyscrapers over the next 20 years, or 600 times the number Sydney now has.

Also fuelling China's resource hunger will be further urbanisation, with the country expected to have 220 cities of more than one million people by 2030, compared with Europe's total of 35 now.

Such confidence in China's growth is helping to nudge iron ore prices higher after a drop of about a third last year.

Spot prices for iron ore recently climbed to $US104 a tonne, while a consensus of analysts polled by Bloomberg forecasts the contract price for iron ore - about $US60 a tonne before freight - to rise by 14 per cent next year.

While China's economic growth this year has surprised on the upside, some analysts are raising doubts about its reliance once massive state spending and directed lending subside.

Credit Suisse, a Swiss bank, points to signs that the economy is losing some momentum, comparing China's yearly industrial production rate with the PMI new orders index - a gauge of manufacturing activity.

China's industrial production rose 16.1 per cent in the year to October year-on-year, from 13.9 per cent the month before, according to the latest figures. The PMI new orders index, though, fell in October to 57.6 from 58.

''Going forward, if Chinese banks only lend at a RMB 200-250 billion ($32-40 billion) per month pace, we will see fixed asset investment growth slow, consistent with less support for commodity prices,'' said Credit Suisse analyst Damien Boey.

An export recovery may help China if its banks slow lending to avoid asset bubbles, he said. ''But certainly, growth will not be as good as it was post-first half stimulus,'' he said.

Flattening trajectory

Mine Life senior analyst Gavin Wendt said he's not as pessimistic on prices as some, but based on the influx of new mining projects, ''it's getting harder to see the same price run-ups.''

''The rising price trajectory is going to flatten off even as the demand continues to increase from China and India,'' he said.

The price for ore will move in a range between $US80-$US120 per tonne over the next couple of years, Mr Wendt said, easing in the long term to a $US80-$US100 range as new production comes on-stream.

Mr Wendt said the Chinese lining up to partner with Australian miners are trying to ensure price stability in the years to come by expanding sources of production as the Japanese did with coal beginning in the 1980s.

Macquarie view

The dim views don't accord with those of Macquarie Bank analyst Jim Lennon, Bloomberg News reported today.

Mr Lennon predicts global commodity demand will have a steady recovery next year, with China leading consumption.

China accounted for about 50 per cent of global commodity demand this year, up from about a third a year ago, Lennon said at a conference in Hong Kong.

Metal prices have rallied 81 per cent this year in London on Chinese purchases, and as a weaker dollar and expectations that the world is poised to recover from its worst recession since World War II stoked demand. Investors raised holdings in commodities to the highest levels in at least three years, BOfA Merrill Lynch Global Research said.

''The leap in demand for commodities in China this year has been quite staggering,'' Lennon said. ''You can see where these commodities are going by the increase in production in China of goods like autos.''

Steel production in China this year may jump to 570 million metric tons, up from about 500 million tons last year, Lennon said. Macquarie's forecast compares with the 565 million tons predicted by the China Iron & Steel Association yesterday.

(Source from Theage.com.au)