Price Not Yet Enough
The iron ore price was unexpectedly resilient over 2016 and into 2017. The monthly average price reached US$80/t in December 2016 and maintained that level into January 2017 compared with a monthly average low of US$40/t in December 2015. A price over US$80/t was last achieved in October 2014. In response to the price rebound over 2016 and early 2017, are there any signs that new projects are being approved?
AME’s data set of iron ore projects in the
development stage (including greenfield projects and brownfield expansions)
includes an assessment of the likelihood of each project expected to come into
production. Projects classified as “committed” are those already completed or
waiting commissioning, or else are so far advanced that it would be uneconomic
to discontinue development. Projects classified as “probable” are assessed as
very likely to come into production, but with less certainty than those in the
“committed’ category. Projects in these two classifications are then combined
with data from current producers to form AME’s Base Case of future supply. Projects
in the “possible” category have some uncertainty on aspects of the project and
they are not included in the Base Case of future supply.
The status of development projects in the AME
database as of December 2016 is summarised in the following table.
The “committed’ category includes LKAB Sweden’s 9Mtpa Leveäniemi and IRC
Ltd’s 3.2Mtpa K&S GOK in Russia. These projects have been in construction
for several years and are vital for each company’s production profile. Two
major projects, 55Mtpa Roy Hill and Vale’s 90Mtpa Carajás S11D exited this
classification in 2016 when they entered production and will contribute to
oversupply in the medium term
In the ‘probable” category are several large projects proposed by the
major producers for which commitments to proceed have been announced. These
projects will require significant capex but have the major transport
infrastructure elements – rail and port - in place. These include: Rio Tinto’s
20Mtpa Silvergrass and 35Mtpa Koodaideri; and BHPB’s MAC South Flank (replacing
Yandi and expected to have a production capacity of around 80Mtpa). In keeping
with current strategies to prioritise margins over volume these developments
are described as replacements for current operations nearing exhaustion rather
than expansions in response to improving conditions in the iron ore market. Rio
Tinto is also developing capacity at West Angelas F (~20Mtpa) and Yandicoogina
Oxbow (~25Mtpa) and Billiard (~30Mtpa) but these developments are to sustain
producing operations and are classified under “production”. Vale will not have
to invest over the next seven years to maintain its capacity and has brownfield
options with an incentive price of around US$50/t to replace production.
Some new supply is coming back to the market from re-activation of
projects suspended in 2015 as prices and demand bottomed. These projects
require minimal capex to resume production and the re-start is due to the
circumstances of the operator rather than directly driven by price increases.
In May and July 2016 Cliffs Natural Resources Inc. re-opened the 5Mtpa
Northshore and the 6.5Mtpa United Taconite mines and associated pellet plants
in Minnesota which were closed in 2015.
In January 2017 US Steel announced a resumption of production at the
nearby 5Mtpa Keetac operation. These re-starts are mainly a response to
increased demand from domestic steel producers as anti-dumping measures reduced
steel imports. These operations should benefit from increasing steel demand
when the new US administration’s infrastructure spending program is
Shandong Iron and Steel resumed production at the 20Mtpa Tonkolili
Project in Sierra Leone in February 2016. The operation closed in December 2014
impacted by the Ebola epidemic. Shandong acquired full control in 2015 when
owner African Minerals Limited went into administration. Shandong has resumed
production at an estimated 5Mtpa and AME believes it is supplying its own steel
operations in China.
The 32Mtpa Samarco project is a possible re-start but is subject to a
difficult regulatory process. AME expects that production could resume in 2018
but may not return to full capacity until 2024
In the “possible” category are 66 projects. Their estimated FOB costs at
future full production would all be in the 3rd quartile or above of the 2017
FOB cost curve for mines in the Base Case supply. However, the major impediment
to development, even for projects lower on the cost curve such 90Mtpa Simandou
and Brockman Mining’s 20Mtpa Marillana, is the lack of transport infrastructure
and the capex required to develop it.
Intending developers of new mines would also be considering the response
of the major producers to changes in demand. Both BHP Billiton and Rio Tinto
have around 15-20Mtpa capacity in existing systems which can be activated once
technical issues with rail transport are resolved. Vale has also provided
guidance that it can expand production from 2016 levels of around 345Mtpa to
between 400-450Mtpa by 2021. The major producers also have extensive mineral
resources and have the capacity to bring them rapidly into production –
Fortescue Metals Group went from zero production to 50Mtpa in four years and to
165Mtpa in a further five years.
AME expects that supply will exceed demand in the medium term until
production from Roy Hill and S11D are absorbed by the market and that price is
not yet at a level high enough to see substantial investment in greenfield