Overview
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Iron ore deposits are found throughout the world on all major continents. According to data compiled by the U.S. Geological Institute, Ukraine, with approximately 30 billion tonnes of crude ore and 9 billion tonnes of contained iron is one of the world’s major iron ore districts as it hosts the world’s 4th largest reserves by iron content which represents approximately 10% of the world’s reserves. Also according to the U.S. Geological Institute, world resources of iron ore are estimated to exceed 800 billion tonnes of crude ore containing more than 230 billion tonnes of iron.
Source: U.S. Geological Survey
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The principal iron ore producing countries are China, Brazil and Australia, in addition to India, Russia, Ukraine and Canada. Ukraine iron ore production in 2010 was expected to total 72 million tonnes, or approximately 3.0% of the world’s production. This would place Ukraine as the world’s 6th largest iron ore producer which is a stark contrast to containing the world’s 4th largest reserves base. Ukraine current production is well below its historical capacity. Between 1970 and 1981, Ukraine produced an average of 123.2 million tonnes per year, representing approximately 52.5% of the former Soviet Union’s average total output of 234.7 million tonnes during those years.
Global Iron Ore Market
Essentially all of the iron ore produced globally is used in the manufacturing of steel. Based on statistics compiled by U.S. Geological Institute, 2010 global iron ore production was expected to total 2,400 million tonnes, with China leading the industry as both the world’s largest producer and consumer of the ore. Production from China in 2010 was expected to total roughly 900 million tonnes, or approximately 37.5% of the world’s production. The Chinese iron ore industry has grown at an annual rate in excess of 20% over the last several years versus the global average (excluding China) of 7%, driven by the country’s burgeoning steel industry and rapid industrialization. TD Newcrest predicts that global iron ore consumption will continue to show strong growth to more than 2.9 billion tonnes by 2012.
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As the world’s largest producer of crude steel, China, with limited domestic supply of iron ore, is also the world’s largest importer. According to the U.S. Geological Survey, China produced 880 million tonnes of iron ore in 2009 and, according to Anglo-American, imported another 628 million tonnes to meet its domestic steel manufacturing demand. The next largest importer is the European Union at 154 million tonnes, followed by Japan with 140 million tonnes and South Korea with 50 million tonnes.
Global Seaborne Iron Ore Market
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The global seaborne iron ore market represents approximately 42% of total iron ore production and totaled approximately 944 million tonnes in 2009 according to Macquarie Research. With just over 68% of total exports in 2009, Australia (384 million tonnes) and Brazil (266 million tonnes) dominate the export market. India (119 million tonnes) and South Africa (44 million tonnes) are also significant contributors to the seaborne market. In terms of iron ore producing companies and based on estimates prepared by AME Mineral Economics, Vale SA, BHP Billiton Limited and Rio Tinto plc were expected to produce 596 million tonnes of iron ore in 2010, representing approximately 63% of the seaborne market. These 3 companies largely dictate the price of seaborne iron ore through negotiations with some of the world’s largest importers including mills in China and Japan.
Fines are the most commonly exported iron ore type, followed by lumps, pellets and pellet feed. The chart below highlights global seaborne iron ore demand growth between 2000 and 2013. By 2013, total seaborne demand is expected to approximate 1,300 million tonnes, a 37% increase over 2009 levels.
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Recent Trends in the Iron Ore Market
Since 2001, Chinese firms have invested approximately US$12 billion into iron ore projects and signed approximately US$82 billion worth of offtake agreements.
As demonstrated by the chart below, China’s demand for iron ore is expected to remain strong for the years to come with demand expected to grow at a rate of 8% per year between 2009 and 2015. Korea comes second with demand expected to grow at a rate of 6% from 2009 to 2015.
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Another recent development is the sharp increase in capital cost intensity involved in iron ore production. According to Macquarie Research, the average cost for bringing production capacity online has more than doubled in the past 5 years. For new projects this has been caused by lower grades and the type of processing infrastructure required for these projects. The trend has also affected mature operations of companies such as Rio Tinto plc and BHP Billiton Limited who are spending significant new amounts of capital to maintain existing levels of export volumes.
Iron Ore Prices
The price of iron ore products is based principally on their iron content and shipping cost. Global iron ore prices have historically fluctuated with global demand for steel and availability of vessels for charter. Quarterly iron ore benchmark prices are set in the seaborne export market (iron ore that is exported by ocean trade routes to coastal or near coast steel making plants) and are typically based on prices negotiated by the three largest iron ore producers (Vale SA, BHP Billiton Limited and Rio Tinto plc) with global steel mills.
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Iron ore prices have increased substantially over the last few years. According to Bloomberg, the current price of iron ore is US¢210 per dry metric tonne unit (“dmtu”), which represents an increase of approximately 117% over the price at the end of 2009 (US¢97/dtmu) and an increase of approximately 240% over the price at the end of 2005 (US¢62/dtmu).
Other iron ore producers generally sell their own customer price contracts on the basis of these global benchmark prices. Because transportation costs from the producers’ port to the purchaser are generally paid for by the purchaser (referred to as freight on board), iron ore producers who ship their products over longer distances generally receive lower prices for their products than producers who ship to comparatively more proximate markets. The principal markets for Black Iron’s potential future products are Western European, Asian, Russian, Turkish and the Middle Eastern purchasers of iron ore concentrate and other related products.