07/10/2010 - 00:00

Iron ore underpins state output

07/10/2010 - 00:00

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JUST as Australia overall once rode on the sheep’s back, the fate of Western Australia arguably now rides in the back of an iron ore haul truck.

Iron ore underpins state output

JUST as Australia overall once rode on the sheep’s back, the fate of Western Australia arguably now rides in the back of an iron ore haul truck.

According to official estimates by WA’s Department of Mines and Petroleum, the state’s iron ore miners racked up a record $33.66 billion in export sales last financial year, representing just more than 40 per cent of the state’s total export tally of $86.3 billion.

But surprisingly, total export revenues were a mere $23.2 million higher than in the previous year despite a huge lift in production.

Driven by resurgent demand from China, as its steel industry returned to full speed after a short pause for breath during the global financial crisis, WA iron ore miners boosted their output by more than 47 per cent to a shade over 396 million tonnes.

The major reason was the significant decline in US dollar prices on long-term contracted sales, compounded by the impact of the stronger Australian dollar.

In May last year, as the world still reeled from the dampening effects of the global slowdown, iron ore giant Rio Tinto agreed to a 32 per cent cut in the US-dollar price of Pilbara ore sold to customers under annual contracts.

However, China’s Iron & Steel Association held out for even steeper cuts in the belief that it could use the uncertain global conditions to recoup more of the huge gains secured by the miners in the preceding five years.

But such tactics ultimately proved to be a massive blunder by Chinese buyers, as market conditions began to rapidly improve while CISA continued to haggle for bigger reductions.

CISA’s stalling instead provided an opening for the major producers to convince their key customers to shift from annual contracts to a more transparent, but more volatile, quarterly pricing system.

The shift resulted in contract prices more closely reflecting spot prices, which began to surge from the middle of last year.

The saving grace for China, however, was the corresponding impact of the rising Australian dollar, which averaged US88 cents for the year, compared to just US75 cents in 2008-09.

Based on the department’s revenue estimates, the dollar’s rise results in WA iron ore exporters achieving an average Australian dollar price of just $85 per tonne in 2009-10, 20 per cent lower than the $106/t average realised the previous year when export volumes totalled 316mt.

With the dollar now trading above US90 cents and expected to hit parity early in 2011, WA producers will have to achieve a similar lift in production just to keep treading water in the absence of a further spike in iron ore prices.

Rio Tinto was the state’s biggest iron ore exporter, notching up record revenue of $17.16 billion for the year, $3 billion more than in 2008-09, as its Pilbara business produced a record 219mt (including the share of minor partners).

Having already committed more than $3 billion to further expansion in the Pilbara since July, Rio expects its Pilbara operations to churn out more than 230mt in calendar 2010, en-route to its target of 330mtpa in 2016.

BHP Billiton Iron Ore was the state’s number two iron ore exporter with export sales of $11.23 billion, $570 million less than the previous year, despite record attributable output of 114mt. It is in the midst of its own multi-billion expansion to boost total output from its WA mines to 240mtpa by late 2013.

Notwithstanding the impact of weaker average prices, the rising dollar and uncertainty relating to the planned mineral resource rent tax on iron ore profits, Andrew Forrest’s Fortescue Metals Group also surged up the export rankings as its steadily raised production in the Pilbara.

FMG shipped a record 40.1mt last financial year, boosting its export revenue by $370 million to $3.22 billion, and continues to rapidly expand. The miner this week achieved a record annualised export rate of 51mtpa, and believes it can attain its immediate expansion target of 5mtpa by the middle of next year.

Behind WA’s big three, the state’s second-tier miners also shifted up a gear to take advantage of resurgent Asian demand.

US miner Cliffs Natural Resources, which took over WA producer Portman Mining three years ago, generated a small increase in export revenue to $876 million as it boosted output from its Koolyanobbing and Cockatoo Island mines to just over 9mt.

Mt Gibson Iron, which operates the Koolan Island mine in the Kimberley and Tallering Peak mine in the Mid West, racked up record output of 7.3mt for the year to book a 26 per cent rise in exports to $536 million. It has since resumed work on its Extension Hill mine near Geraldton, which is expected to yield another 3mtpa from the second half of next year.

In addition to expansions planned by existing producers, new mines are also slated to start exporting over the coming year, including Citic Pacific’s $5.2 billion Sino Iron magnetite mine in the Pilbara, Gindalbie Metals’ $2 billion Karara iron ore mine in the Mid West, and Atlas Iron’s new Abydos and Wodgina mines, south-east of its Pardoo operation in the Pilbara.

Based on the WA government’s growth projections, state iron ore exports should approach 420mt this financial year.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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