IRON ORE
Big Hitters and Foul Balls
March 2019
The global iron ore market is largely dominated by four key players: Vale, Rio Tinto, BHP, and Fortescue Metals. Together, these companies make up almost a full 50% of all iron ore production, largely centering their operations in Australia and Brazil. Changes in the global market indicate that their overall share may decrease over the next few years, but their mineral reserves, capital access, and developed infrastructure make it hard for smaller or newer producers to gain a foothold.

While outlooks have been rosy for these producers for years, the industry has seen several large-scale disasters—the ramifications of which have the potential to shake up the established producer hierarchy.

 

 

 

Vale (16.8%)

Vale’s name is all over the headlines… but not for any of the right reasons. After Vale’s Córrego do Feijão iron tailings dam burst in January, the company—and Brazil as a whole—has seen blow after blow to its iron ore production. In total, the company could temporarily lose as much as 50Mtpa of production capacity—not an amount that could unseat it as the largest producer, but a significant 5% deduction from its total capacity nonetheless.  

The loss of the ability to use any of its upstream tailings dams, plus the now legally-enforced safety requirements and decomissioning activities required by the Brazilian government, are likely to delay operations at Vale’s sites for years. Other producers will be impacted, particularly those using upstream tailings dams, but as the company responsible for two dam breaches in three years, and as the largest operator in the region, the burden will fall most heavily on Vale.

The resources found in Vale’s Brazilian sites contain an average of 67% iron ore—the highest level on the planet. This has allowed the company to corner the high-percentage 65% and 67% iron ore fines and pellets market and sell their product at a significant premium—often at least US$15-20/t above 62% ores. Sustained outages of Vale’s high-quality product may lead to an increase in the premium for 65% and 67% ore.

 

Rio Tinto (12.4%)

Rio Tinto operates what it calls “the world’s largest integrated portfolio of iron ore assets” in the Pilbara region of Western Australia—a series of more than 35 individual iron ore projects and prospects operating in a tightly-clustered iron-producing region. Having sold off its Brazilian-based iron ore projects in the early 2010’s, the company has instead focused on developing a series of consistently-large and high-quality iron ore projects in Australia, where Rio generally outputs a 62%-grade iron ore in large volumes.

While demand for 62% remains strong, the product has not seen the dramatic increase in premium that 65%+ ores have, particularly as high stockpiles and lowered demand shape the Chinese iron market. Operating in a country where labour costs are high, Rio Tinto has defined its ongoing strategy by bulk and automation, producing large quantities of iron ore with increasingly-sophisticated automated technology. Sophisticated mining sensors and automated haulage have been cornerstones of its ‘Mine of the Future’ strategy, and it is currently the owner of the world’s largest automated truck fleet.

 

 

BHP (10.3%)

BHP is one of the—but not the—largest mining companies in the world by revenue. The miner operates a vast range of projects, including the extraction and refining of hydrocarbons, copper, gold, silver, zinc, coal, potash, nickel, uranium, and iron ore. Its iron operations, like Rio Tinto, are largely confined to the Pilbara region of Western Australia, with one exception: the Samarco Project in Brazil.

BHP and Vale each hold a 50% stake in the Samarco mine, a currently-suspended iron ore operation comprised of a mine and three concentrators. The mine was suspended in 2015 after its tailings dam breached, killing 19 people and sparking a wave of investigations around the safety of upstream tailings dams. Relief and repair efforts in the area, and compensation for victims of the disaster, have made an ongoing dent in BHP’s operating budget.

Its Pilbara iron operations have been largely controversy free, however, and the last six months of 2018 saw the company’s iron ore projects earn the company US$7.2bn on the back of rising prices.

 

Fortescue Metals (7.2%)

Fortescue Metals is a slowly-expanding producer of iron ore centered, as many other large iron companies are, in the Pilbara region of Western Australia. The company has numerous sites in the region, key amongst them being its Chichester and Solomon hubs which have a combined capacity of 170Mtpa.

The company produces lower-grade ore than the other top companies, blending a high-quality Chichester ore with low-phosphorous Firetail ore to create its “Fortescue Blend” of 60.1% fines, which it began to ship to China in December of 2018.

The company remains competitive by operating at scale and working to reduce logistical bottlenecks, and its self-proclaimed goal is to be the “safest, lowest-cost, and most profitable” mining company. Like Rio Tinto, Fortescue has undergone a significant automation campaign, converting large portions of its existing truck haulage to an automated system. It has also undergone significant streamlining and de-bottlenecking projects over 2018, lowering overall cash costs. Higher volumes of ore shipped will lower costs even further through 2019.