Access issues to the fore amid Hedland shipping squeeze

If, as seems likely, port access is the primary motivation behind Fortescue Metals Group and Hancock Prospecting’s raids on the share register of Atlas Iron, then it might be time for the federal and Western Australian governments to take a fresh look at the country’s most important export facility – Port Hedland.

Once a minor harbour for coastal service vessels that brought in essential supplies ahead of the wet season when the road north was closed, then taking out cattle and the occasional shipment of copper and asbestos, Port Hedland today is one of the world’s major raw material ports.

Shipments of iron ore top 500 million tonnes a year worth around $50 billion at current prices, with an increasing tonnage of lithium and other minerals being added to the total.

But while the Pilbara Ports Authority does a great job managing the dramatic increase in ship movements, there is an obvious squeeze developing that will eventually lead to a ‘port full’ sign being erected; and that’s when Australia will have a problem.

The management team at BHP, the iron ore pioneer at Port Hedland, could see the squeeze developing a decade ago, drawing up plans to spend an estimated $US20 billion on an outer harbour that would shift the bulk of its exports away from the narrow confines of the inner harbour to a new, purpose-built iron ore export jetty and associated wharves.

The outer harbour plan was shelved in 2012 when BHP decided the cost was prohibitive and demand for iron ore seemed likely to slow as Chinese steel production peaked.

In hindsight, both decisions were correct.

Port Hedland did need an outer harbour, but BHP’s cost forecast made the project uneconomic; a better solution was to wring more capacity out of the company’s berths inside what was once a tidal creek.

The situation has not changed in the six years since BHP put its outer harbour plan on ice, despite every effort of the port authority to manage ship movements and a policy of encouraging the development of alternative ports, such as Cape Preston and Anketell.

But what Hancock’s and Fortescue’s acquisitions of 19.9 per cent stakes in Atlas highlights is that they believe the inner harbour at Port Hedland remains the best place to load iron ore carriers, a view shared by BHP and smaller exporters such as Atlas, which has a majority stake in a group known as the North West Iron Ore Alliance (NWIOA).

An aerial view of Port Hedland shows the problem with berths on either side of the harbour, with all shipping movements in and out through a narrow channel that has to be regularly dredged to accommodate ships carrying cargoes of up to 270,000 tonnes of ore.

From one perspective, Port Hedland is a star of the Australian economy. From another it is an accident waiting to happen, and a classic case of putting too many eggs in the one basket.

Plans to further expand Port Hedland by developing berths deeper inland after dredging shipping channels into the old creek beds have been drawn up, but if that happens the squeeze point, where Utah Point is a stone’s throw across from BHP’s eastern berths, becomes even more critical.

Shipping movements have been well managed until now, but it’s obviously getting harder each year.

Fortescue’s interest in Atlas is the latest indication of the problem with a company that already has a large inner harbour position appearing to be interested in a very small company that has little to offer by way of iron ore tonnages, but a lot to offer through its shipping movement arrangements with the port authority.

Investment bank UBS pointed out recently that Atlas has a 63 per cent stake in the NWIOA, which, in turn, has a deal with the port authority to export 50mtpa of ore from a berth in the South West Creek area of the harbour.

South West Creek is the same location where Mineral Resources is aiming to build its own 50mtpa capesize berth.

It is already in formal negotiations with the Pilbara Ports Authority to secure tenure for its planned berth.

Another asset held by the NWIOA is a classification of its ship movements as B-class, which, according to UBS, means it has priority sailing rights over all other class of ship movements other than A-class.

“FMG currently has 120 million tonnes of A and B class, which means the timing of its remaining 50mt (FMG ships 170m/t a year) out of the port is subject to other ship movements,” UBS said.

“Ownership of Atlas shares enables FMG to have input into NWIOA’s development and potentially increase its B-class tonnes.

Ultimately, we believe FMG wants a say in the development of its own backyard, the Pilbara.”

There are other reasons for FMG being interested in Atlas; an estimated $500 million in tax losses to offset against its profits is one, while buying a position in the fast-growing lithium business is another.

But the key to what’s happening with Atlas and the potential development of a bidding duel (or deal) with a rival suitor, Mineral Resources, is the same issue that has dominated the Pilbara for decades – infrastructure, either in the form of railways or ports.

At some point, perhaps sooner than later, both the WA and Australian governments will need to get involved in the battle for loading and shipping rights in Port Hedland with the obvious long-term solution being the revival of BHP’s outer harbour plan.

Steel got it

Iron ore is not yet affected by the trade-war winds blowing out of the US, but there is a company with WA connections that reflects the changing nature of the US economy under Donald Trump.

Cleveland Cliffs, the name for a business also called Cliffs Natural Resources, has emerged as a local darling in the US, even as it prepares to close or sell the Koolyanobbing mine it operates in WA.

Koolyanobbing has become uneconomic because of its low-grade ore and long shipping distances to Asian markets, whereas in the US, Cleveland Cliffs is undergoing a revival thanks to Trump’s encouragement of the US steel industry.

Ore mined close to the shores of the Great Lakes in the US is shipped a relatively short distance to steel mills in Ohio, where closures have been superseded by plant re-openings and increased demand for iron ore.

The net result is that the share price for the once-unloved Cleveland Cliffs has risen by 30 per cent over the past three months to $US8.29, with investment bank Citi tipping another leg up to $U11 a share.