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MEI Online: Commodities: Metallic Ores: Iron: Latest News: July 20th 2004

:: Strong Iron Ore Demand Causes Mine Expansion Initiatives and Shift in Iron Ore Production Costs  

Surging Chinese iron ore consumption is causing a fundamental shift in the dynamics of world iron ore demand, with producers scrambling to expand production in response to increased demand and higher prices. Mine expansions and the development of new mines will result in a significant shift in iron ore production costs over the next five years, although CVRD and Rio Tinto will remain the lowest cost iron ore suppliers into Europe and Asia respectively.

The depreciation of the US dollar has impacted the margins of iron ore producers as they face unique difficulties with depletion of high quality ore, increasing processing costs and higher stripping ratios. Against this background, MCIRS has released detailed mine costing that covers existing and new operations. The cost study provides historical and forecast production from 2002 to 2008, with product split breakdown into lumps, fines and pellets. Individual mine data sheets with detailed mine-site and non mine-site costs are also presented.

After the industry’s consolidation drive in 2000, the top three producing iron ore companies, CVRD, Rio Tinto and BHP Billiton account for about 70% of global seaborne trade. These companies also own the world’s best iron ore resources and they have well established infrastructure that allow for low cost, flexible capacity expansions and development of new mines to meet market demand.

Brazil’s CVRD continues to dominate world seaborne trade with about 33% market share in 2003. The company embarked on a series of investments in 2003 including a US$ 61 million capacity expansion at its Carajás mine. In 2003, Carajás produced about 59Mt, positioning it as the largest producing iron ore mine. The mine has the potential to produce 70Mtpy and is geared to take advantage of growth in demand. CVRD also spent US$ 27.7 million on Fábrica Nova and Brucutu mines. These two mines will add a potential 22Mt to CVRD’s production capacity. CVRD purchased Mitsui’s remaining stake in Caemi in September 2003, bringing its total acquisition to 60.2% of Caemi’s total capital. As a result CVRD has majority control in MBR.

Rio Tinto started production at its West Angelas mine in 2002. It also brought the Eastern Ranges Mine into production in 2004 to replace some of Paraburdoo’s depleted pits. The company’s Yandi mine has steadily increased exports by about 14% between 2000 and 2003. The low cost Yandi mine is expected to ramp up to 34Mt per year under Rio Tinto’s capacity expansion initiatives. The West Angelas operation is also being geared towards capacity expansion to 25Mt per year, underscoring an overall increase in Rio Tinto’s product range (Brockman, Pisolites and Marra Mamba) in response to market demand.

BHP Billiton brought its Mining Area C mine into production in 2003 and introduced the Marra Mamba ore as a standalone product. Approvals for the development of Orebody 18 have also been secured and could be brought into production to supplement the company’s production as demand dictates. BHP Billiton has progressively increased its rail capacity through additional passing sidings and rolling stock. The company is expanding its port to over 100Mt per year capacity, including a fourth shipping berth and processing and stockpiling facilities in a new Western Stockyard at Finucane Island. Like Rio Tinto, BHP Billiton is advantaged by its proximity to Asian markets and the high lump proportion of its total production enhances the company’s overall margins.

Australia’s Hope Downs will add a potential 25Mt per year to Australia’s iron ore capacity over 5 years. Environmental approvals for the mine, railway and port were granted in 2002 and production is scheduled for 2007. Hope Downs will be producing Marra Mamba ore, making it the third company to market the product on a standalone basis after Rio Tinto’s West Angelas and BHP Billitons’ Mining Area C.

Kumba’s Sishen mine has been maximising production and distribution volumes through plant modifications. The mine’s new up-current classifier plant is expected to increase fine ore capacity by 300,000 tonnes per year. Sishen is also utilising improved primary feed systems which will also facilitate a further 700,000 tonnes per year capacity. Kumba is undertaking technical studies to evaluate and determine options to increase its iron ore production by up to 8.5 Mt per year within five years.

Compared with 2002, global weighted average FOB Costs increased by 3% as a result of deteriorating operating conditions and the depreciation of the US dollar. However, capacity expansion initiatives, replacement of high cost mines with newly developed low cost operations and efficiency improvements in mining, processing and ore transportation will enable real costs of production to decline through to 2008.



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