‘Vale’ to iron ore price control

FORTESCUE Metals Group has increased annual iron ore production more than any of its competitors since it entered the market in 2008, according to analysis by Business News.

While Rio Tinto and BHP Billiton continue expansion plans and Hancock Prospecting’s Roy Hill project prepares for production, the state’s third-largest iron ore miner is also preparing to increase its production capacity.

The latest battle in the war for iron ore supply market share was started when Fortescue chairman Andrew Forrest called for a cap on production of the bulk commodity to boost prices.

The idea was quickly rebuffed by Rio Tinto boss Sam Walsh and Hancock’s Gina Rinehart, who argued it would be against the national interest.

When Fortescue entered the iron ore market at the end of the 2008 financial year, Western Australia’s production of the bulk commodity was 290 million tonnes per annum, according to the Department of Mines and Petroleum.

In the ensuing period, Rio has increased its annual global production by about 80mt, and BHP Billiton by a similar amount.

Both statistics include only the relevant share of production from joint venture partnerships.

FMG, however, is set to achieve output of around 155mt this year, less than a decade after it started mining.

That figure dwarfs other individual company production increases, although BHP and Rio were already ramping up production by 2008.

As a whole, WA’s iron ore production is more than double the level of 2008, with the figure for 2014 coming in at 631mt, up 341mt.

Fortescue’s share of that increase is roughly 45 per cent.

BHP and Rio have both lifted annual global production around 120mt each since 2004, and both are predicting big increases on the back of capital expenditure programs. BHP, as an example, has a global target for 225mt of production this year and 290mt in 2017.

It is this increase in capacity that appeared to be the focus of Mr Forrest’s comments, a level of output which Fortescue could be unable to be match given its current struggle to secure debt financing.

In the internal calculations of the mining giants, an increase of 60mtpa in a market heading towards 2 billion tonnes annually would have an almost immaterial effect on price, but the capital investment into extra production could nonetheless achieve a good return for shareholders.

Ultimately, then, the effectiveness of a cap would depend on the ability of other countries to increase production and fill the gap.

Of immediate concern would be Brazilian giant Vale, which achieved a record 319mt of production in 2014, cementing it as the largest global player in the commodity.

As previously reported by Business News, Vale has embarked on lowering its transport costs through use of bigger ore carrying vessels to make it more competitive in the Chinese market.

Chamber of Minerals and Energy chief executive Reg Howard-Smith said WA producers were price-takers, not price-makers, in the international market, representing just 30 per cent of global production in 2013.

“Other companies and jurisdictions around the world are pushing to get their product to market,” he said.

“If Western Australian producers don’t meet the demand in the world market, then other significant players such as Brazil, Russia, China, India and emerging producers in Africa will take advantage.”