Cost and quality the right combination

It seems Western Australia’s most important industry, iron ore, has dodged a bullet. For now, at least.

The commodity’s price has edged higher after a 33 per cent plunge since the start of the year to briefly trade at $US99/t on the Singapore exchange mid-March.

Those signs of recovery were driven largely by a return of demand from China, but also because high-cost, non-traditional suppliers were squeezed out by the price fall.

The removal of material mined in countries such as India, Chile and Iran is helping the iron ore market rebalance, with major suppliers such as Australia and Brazil plugging the hole created by the exit of high-cost producers.

However, recent events provide a timely reminder for Australia that it could suffer a similar fate in the future, albeit from countries able to deliver iron ore of a higher grade, with fewer impurities, produced using renewable energy.

Canada, with its abundant supplies of hydroelectricity, is a small iron ore rival, but it is blazing a trail in the field of producing the high-quality ore that’s in strong demand from steel mills under increasing pressure to reduce their emission.

Two reports published earlier this month focused on the issues of what happens to high-cost miners when prices fall, and how a high-quality miner can benefit from shifts in a market increasingly driven by environmental, social and governance factors.

The first report was a research note from investment bank Citi on how a surge in production from non-traditional iron ore miners chasing a price – which peaked in early January at $US145/t – had flooded the Chinese market in the first two months of the year.

“In January-February, non-traditional imports by China were up forty-seven per cent compared with an eight per cent increase from traditional sources of iron ore,” Citi said.

Non-traditional iron ore supply into China has been correlated to the iron ore price, Citi said, with the clear inference that high-cost miners will drop out of the market as the price falls.

Something like that could happen in the future as low-grade (high pollution) iron ore loses market share to high-grade (low pollution) ore.

A glimpse of what that might mean for WA came in the second report into iron ore from another bank, Goldman Sachs, which attended a presentation in Sydney by Champion Iron, a Canadian miner with Australian roots and an ASX listing.

What caught the eye of the Goldman Sachs analysts was how Champion was winning by producing high-grade iron ore pellets to earn a premium price.

Grading up to 69 per cent iron, compared with WA’s average export ore grade of around 60 per cent, Champion’s pellets cost more to make but are much lower in impurities such as phosphorous, silica, and alumina, and fetch at least $US70/t more than WA’s ore.

Champions pellets, produced using hydroelectric power, are of such a high grade that they can be blended down to 67.5 per cent and still command a peak price.

The quality issue explains why Goldman Sachs has Champion as a stock to ‘buy’ with a price target of $9.40, up 31 per cent on last sales at $7.14.

Quality is also why Australian miners such as Fortescue are investing heavily to lift their ore grade to meet customer demands.

There are other Canadian iron ore producers riding the ESG wave, including the Rio Tinto-controlled Iron Ore Company of Canada. And while Canadian iron ore is not a threat to Australia or Brazil, the example of success built on ESG and quality is a pointer to the future.

Banana drama

ANDREW Forrest’s renewable energy ambitions slipped on a banana skin when authorities vetoed his plan for a 10-turbine wind farm close to the Wheatbelt town of Southern Cross.

A seemingly good idea, the $85 million project was knocked back because it was deemed to be too close to the local airport.

Nobody has yet drawn the connection between a rejected renewable energy project and the ‘banana’ warning from Australia’s former chief scientist, Alan Finkel.

But earlier this month, Dr Finkel said one of that the biggest impediments to a renewables future was the ‘banana factor’, an acronym for ‘build absolutely nothing anywhere near anything’.