Safeguard puts pressure on iron ore

There are three reasons why Rio Tinto is developing its next big iron ore mine in the West African nation of Guinea rather than Western Australia: it’s easier, cheaper, and should be more profitable.

Risks might be higher in Guinea, where Rio Tinto’s part-owned Simandou mine is taking shape, but the appeal of high-grade ore in a jurisdiction with fewer government controls outweighs potential problems.

For WA, which depends on its mining industry as a wealth creator and employer, recent changes to carbon dioxide pollution laws have become the latest impediment to future investment.

The major concern is that a vision of the state adding value to its raw material exports – such as turning low-grade iron ore into a high-value product or making batteries from local metals – is in jeopardy.

Unless carefully managed, there is the potential for WA to be stuck in the past as a quarry supplying basic raw materials with minimal value being added to exports.

Two seemingly disconnected events demonstrate the challenge in adding value while complying with the Australian government’s new ‘safeguard mechanism’, which is part of a plan to limit emissions of carbon dioxide.

The first clue to an emerging problem was the choice of words by Rio Tinto chairman Dominic Barton in his address to the company’s annual meeting in London earlier this month.

Mr Barton said there was a fundamental tension between the need to mine the metals needed to achieve energy transition away from fossil fuels while also meeting government and community demands.

“The big question to work through is how do we fulfil our role in energy transition in a way that is socially and environmentally responsible and yet sufficiently commercial to attract the investment required,” he said.

But then came a surprise, because Mr Barton named four minerals as being essential to energy transition: copper, lithium, aluminium and high-grade iron ore.

The first three – copper, lithium and aluminium – are obvious inclusions on an energy transition list.

Iron ore is not; unless it’s high grade.

And that’s when the second event kicks in, because one of WA’s biggest value-added mineral processing projects – the $16 billion Sino Iron development – is in trouble with the safeguard mechanism.

Chinese-owned CITIC Pacific Mining, which mines low-grade magnetite ore, is concerned the new carbon dioxide emission laws will put it at a disadvantage with rivals such as BHP, Rio Tinto and Fortescue Metals Group, which mine high-grade hematite ore.

Citic’s complaint is that it has been doing no more than complying with a decades-old state government request for low-grade iron ore to be upgraded, only to be whacked by the new federal safeguard mechanism.

The issue, which is directly linked to Mr Barton’s comment about a preference for high-grade iron ore, is that Citic’s magnetite assays around 30 per cent iron, which must undergo an energy intensive process for conversion into a high-grade concentrate assaying around 70 per cent iron.

Getting to the point of operating a commercially successful valueadded iron ore processing project has been tortuous for Citic, which has suffered spectacular cost blowouts and completion delays.

After almost 20 years of doing what the WA government wanted, it now finds itself being punished because it operates a big gas-burning power station to drive the ore crushing plant.

BHP and Rio Tinto, which tried and failed to develop value-added additions to their dig-and-deliver operations, are less affected by the safeguard mechanism.

Citic chairman Zeng Chen told The Australian newspaper magnetite miners would be penalised under the proposed mechanism because of their higher emissions.

“The scheme currently applies the same iron ore production variable to both (magnetite and hematite) despite very different value creation pathways and product characteristics,” Mr Zeng said.

“There’s no consideration of the fact that the ore we remove is harder, has a much lower grade and we need to mine greater amounts for beneficiation to produce a saleable concentrate.”

Common sense should prevail, and a separate category created under the safeguard mechanism for projects such as Citic’s, providing time for projects already built to switch to a renewable power source.

Even with a change to the safeguard mechanism to accommodate existing magnetite processing projects, there is a clear warning from Mr Barton that Rio Tinto is not interested in adding value to the billions of tonnes of low-grade ore on its tenements.

Past failures, such as the ill-fated hot briquetted iron project at Port Hedland, will have coloured Rio Tinto’s view of low-grade WA ore and the difficulties of converting it into an exportable material.

Citic’s experience under the safeguard mechanism will have compounded the view that adding value to raw materials in WA might not be commercially viable.

High-grade hematite ore already being mined in the Pilbara by Rio Tinto is a clear winner under the safeguard mechanism, and high-grade ore to be mined at Simandou in Guinea will be the future winner.

WA’s iron ore industry will emit less carbon dioxide under the safeguard mechanism, but it will also be mining less ore.

Rating the rises

Fire up the DeLorean for a trip back to the future, but don’t expect it to be a pleasant journey.

The target date for a spot of time travel in the car used by Marty McFly in the Back to the Future movie is 1973.

That was the second year of the government led by Gough Whitlam and the year of the Yom Kippur war between Israel and Arab nations, followed by an embargo on oil exports by the Organisation of Petroleum Exporting Countries.

More importantly from an economic perspective, it was a year when the price of oil started at $US2.70 a barrel (believe it or not) before rising by more than 1,100 per cent to reach $US35/bbl by 1980.

The inflation caused by the oil crisis of the 1970s prompted a sharp increase in interest rates around the world, leading to a deep recession in the early 1980s.

If those interest rate increases have echoes of what’s happening today, wait until you layer over the oil production cuts introduced earlier this month by OPEC and the corresponding price rise (with forecasts of even higher oil prices to come).

It appears that recession-feeding combination of high interest rates and high oil prices is being served again.

Welcome back to the 1970s, a decade that wasn’t all bad, just most of it.