Australia looking at five more years of iron ore riches

As iron prices crest the US$200 per tonne mark, the possibility of any near-term collapse in those prices continues to fade.

Iron ore futures closed overnight at US$213.00/t, while at the Dalian Exchange in China the metal’s contracts rose on Monday by the daily limit — although presumably could have gone even higher had that limit not been in place.

And in Singapore on Monday, futures soared 10% in early trading.

ANZ Bank reported Tuesday that “[Chinese] steel mills are clamouring to secure cargoes of the steel making raw materials”.

The steel mills are worried that Beijing will limit steel production to cut costs of iron ore imports.

Guinea mine is at least five years away

But there is a longer-term picture.

Now it seems the long-feared alternative to Australia as a supplier — the proposed Simandou mine in Guinea and part-owned by Chinese interests — is “at least” five years away from production, and more than a decade away from reaching full output levels, according to the Commonwealth Bank.

Even in its initial stage, Simandou would produce only 4% of the seaborne iron ore market.

This contrasts to the fact that China is dependent on Australia for about 50% of the iron ore it consumes (although latest Chinese published figures put it at 60%).

In a report out Tuesday, CBA’s commodities analyst Vivek Dhar concluded that China’s reliance on Australian iron ore is unlikely to change.

Coal experience may deter iron ore boycott

China may want to block iron ore imports from Australia as it has done with coal, barley, wine and other commodities.

While there is no doubt that diplomatic relations are worsening between the two countries, China’s own goal on coking coal may stay its hand.

Mr Dhar, who is one of the most authoritative Australian analysts on China commodity consumption, pointed out the Chinese are now paying around US$240/t for seaborne coking coal, which is more than double Australia’s premium coking coal price of around US$110/t.

This, as well as the high iron ore price, is feeding into steel making cost blowouts.

The ANZ economics team, in its Tuesday morning note, is concerned that China’s decision to indefinitely suspend the China-Australia Strategic Economic Dialogue has lifted the risk of potential disruptions to supply of iron ore from this country.

However, the CBA takes the view that this scenario is unlikely given China’s steel sector being so heavily dependent on Australia for half its needs.

China’s latest warning: missiles

This concern coincides with a warning from Beijing’s mouthpiece, the Global Times, laying out what China should do if Australia joins the US in any action to protect Taiwan.

This includes the use of intercontinental ballistic missiles being launched against this country.

“The plan should include long-range strikes on the military facilities and relevant key facilities on Australian soil if it really sends its troops to China’s offshore areas and combats against the PLA (People’s Liberation Army),” the paper stated.

“China has a strong production capability, including producing additional long-range missiles with conventional warheads that target military objectives in Australia when the situation becomes highly tense.

Brazil supply still struggling

Mr Dhar noted that China produces only 15% of its iron needs.

Any restrictions on curbing Australian imports would “lead to a surge in its iron ore prices,” he says.

The ANZ report made another point: iron ore demand outside of China is also picking up, which will be a factor pushing up the price.

Brazil is the second largest supplier to China (about 17% of its iron ore consumption) but the industry there has struggled to return to its peak since Vale’s catastrophic dam collapse in 2019 led to mine closures.

Mr Dhar added that, rather than affecting Australia, the output from Simandou is likely to be used as a substitute for “unreliable” Brazilian supply.

“It will also act as substitute for high-grade domestic concentrate in China”.

Diversification away from Australia is also one of the reasons for Simandou — but that is ranked by Mr Dhar behind the considerations of Brazilian and domestic supply.