Iron ore hopefuls in race for China share

That the runaway Chinese economy is the reason for all that is right with Western Australia’s booming mining sector is becoming a bit of a cliché.

And it might be masking some problems a few years down the road.

Just about every word uttered or story written recently about another mine coming on stream, joint venture done or equity position taken by a big Chinese company, is heaped on the back of China’s powerhouse economy. There, I’ve done it again.

Problem is, there’s no denying the influence of China on the WA resources sector, and while skeptics abound, the overwhelming view is that China’s demand for commodities will continue for at least the next five years and probably the next decade.

This is because China is undergoing an industrial and urban revolution. The construction and development phase of this revolution will bring 300 million people into the cities in the short term to augment a growing middle class with good disposable income and desire for the lifestyle trappings of the West, most of which need metals to produce.

It’s not new. The father of Australia’s iron ore industry, Lang Hancock, was a lone voice when he predicted it back in the early 1960s before our first iron ore exports to Japan.

Statistics can be a bit mind numbing, but are relevant to what has happened in WA this year and will occur over the next five or more.

China is expected to account for 30 per cent of the world’s metals demand by 2010, with iron ore-based crude steel production up from the current 340 million tonnes this year to 500mt in 2009.

Global investment bank Goldman Sachs has estimated it will take just 35 years for China to supplant the US as the world’s biggest economy. A new census by China’s national bureau of statistics agreed, but said it could take until 2050.

However, the strength of China’s growth and its consumption of raw materials has taken the WA mining sector, and many others, by complete surprise.

Australia’s two biggest iron ore miners, BHP Billiton and Rio Tinto, have either just spent or have in the pipeline more than $10 billion worth of short-term Pilbara expansion plans.

“We completely underestimated the increase in iron ore demand and we are running as fast as we can to catch up,” BHP Billiton president, iron ore carbon steel materials, Graeme Hunt, told a recent conference.

Rio Tinto plans to lift production to 200mt/year in 2007 and BHP Billiton to 130mt/year in the same period. These two heavyweights, along with giant Brazilian CVRD, carry 80 per cent of the world’s seaboard iron ore trade.

Australia’s chief commodities forecaster, the Australian Bureau of Agriculture and Resource Economics (ABARE), said iron ore exports were expected to jump 17 per cent to 267mt this financial year, with export earnings rising a massive 72 per cent to nearly $14 billion.

While struggling to supply existing markets such as Japan, South Korea and an increasingly strong China, India, whose future economic growth has been compared to China, looms on the horizon.

This has spawned a climate in which Chinese and South Korean iron ore buyers have moved to lock in future supplies by investing in start-up iron ore projects and in the companies that control them, in order to reduce their reliance on the big players.

And while this may appear an ideal situation for current and near WA commodity producers, there are some major supply stumbling blocks for all commodities. Among these is a chronic lack of infrastructure, a crippling shortage of skilled labour and cost blow-outs that have already stopped a number of major projects, such as Alcoa’s billion dollar plus Wagerup alumina refinery expansion.

Surprisingly, a major problem throughout the entire mining industry is the shortage of big truck tyres, mostly for the Haulpaks, a problem partly solved for Rio Tinto via a long-term contract with a major supplier. But for many miners it’s a case of waiting in the queue.

This whole scenario has spawned a new era of cooperation, bordering on consolidation.

Three new iron ore hopefuls in WA’s emerging Mid-West region have joined forces to lobby for better infrastructure facilities to handle a potential 60mt/year operation from their untapped deposits to the north-east of Geraldton.

More than $A58 billion worth of projects are either under way or planned in WA over the next few years, including Chevron’s $11 billion Gorgon gas/condensate project, Woodside’s $5 billion Pluto LNG project and $1.6 billion Angel gas/condensate development, and the North West Shelf’s $2 billion fifth LNG train.