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Iron ore miners in for long haul

LIKE farmers watching the skies for signs of rain, companies worth billions of dollars are scanning the economic horizon, trying to determine whether it will be a good season for iron ore.

In luxurious hotels, enduring nights of grinding hospitality, Australian executives are engaged in the annual black comedy of negotiations with Japanese steel companies.

The discussions proceed with the delicacy of a minuet, yet with an undercurrent of toughness that tests the mettle of two cultures.

This year livers may suffer more than usual; there are indications that the Japanese will delay a decision on how much they are willing to pay for ore as long as possible, waiting to see if the world economy, and particularly their own, falls into recession.

If the signs worsen, it will strengthen their case to offer no increase, or at best a derisory one.

There are forecasts that Asia in particular will suffer quickly if the worst expectations occur for the American economy. Some respected analysts are predicting that global steel production will decline by 2 per cent in the next year – hardly cataclysmic, but a figure which the Japanese will employ – along with even gloomier ones – to resist price increases.

Some analysts claim that the Japanese industry produced too much steel last year, that there are now forbidding inventories that will inhibit demand for iron ore in the next year.

There is widespread uncertainty in Asia, in particular, about the outlook for the coming 12 months, although most economists agree that the region is better placed to cope with any downturn than it was four years ago.

In the past negotiations have sometimes dragged on beyond the end of the nominal “ore year”, which expires at the end of March, and while industry sources say there is still a month to reach agreement, the Japanese may well seek to delay resolution beyond that time.

Of the iron ore companies now in Australia, only BHP and Rio Tinto, point to strong demand for their ore, and steel prices which have so far remained stable. They are said to seek increases of about 10 per cent, after winning between 4 and 6 per cent (depending on ore type) a year ago.

Iron ore prices are now half what they were early in the industry’s history, when adjusted for inflation, and only increased productivity and a weak Australian dollar have maintained the companies’ admittedly strong profits of recent years.

A recent study by the Sydney research group AME Mineral Economics, found that cash costs of producing iron ore had fallen by 13 per cent in recent years, and further more modest savings could be expected.

Now, say the miners, it is time for prices to increase, as they have in Australian coking coal exports (which are about to rise by 8 per cent for contracts for coal, in response to the brisk steel industry demand). On the spot market rises have been two and three times as great.

Meanwhile, three companies that seek to add value to the State’s iron ore maintain their optimism.

Austeel announced recently that it would seek to launch a steel plant at Newcastle, rather than in Western Australia, but would still build a hot briquette iron plant here.

Two other groups remain enthusiastic about new processing ventures.

The supporters of Kingstream Steel and the Mt Gibson iron project believe the economics of their ventures are superior to those of Austeel – and they believe that they will succeed.

Kingstream is expecting “some exciting developments” in the next three to six months.

The executives at Mt Gibson, with a more modest target of producing high grade pellets for the steel industry, are reticent, but significant developments are expected in the near future.

However, all three projects are subject to some scepticism among sources in the international steel industry, not because of the intrinsic worth, but because of the immediate prospects in the market which may also affect iron ore prices..

While this should not affect projects that will not be producing iron or steel products for several years, the industry sources say that it is difficult to interest investors in such an uncertain climate.

Kingstream managing director Nick Zuks – another persistent advocate of steel production in Western Australia who has been working on the project for nine years

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