Western Australia’s iron ore industry continues unprecedented growth in size and value, leaving the rest of the mining sector in its wake.
The scale of Western Australia’s mining boom means that, just occasionally, it’s useful to take a step back, look at the numbers, and remind ourselves how much the state has changed.
In 2002, when there was barely a hint of a China-led mining boom, the state’s iron ore industry had total output of approximately 180 million tonnes a year.
Since then, the industry’s capacity has more than doubled to nearly 460mtpa, courtesy of multi-billion dollar expansion projects by industry heavyweights Rio Tinto and BHP Billiton and the emergence of new producers led by Fortescue Metals Group.
Projects under way will lift the industry’s total capacity to about 790mt by 2015, as Rio, BHP and Fortescue continue growing, Citic Pacific and Karara Mining enter production, and smaller producers keep growing.
But it does not stop there.
Adding in the expected production from 12 ‘advanced’ projects (see attached table on 'WA Iron Ore & Mining and Mineral-Processing Projects') will lift industry capacity to 1,075mtpa.
And then there is a raft of long-term potential projects that are under consideration. Collectively, they would lift the industry’s total capacity closer to 1,500mtpa.
With growth of this scale, it’s easy to see why Premier Colin Barnett says WA is going though one of its great periods of development.
His thesis is supported by the even faster growth of the liquefied natural gas (LNG) sector, a topic covered in detail in WA Business News’ May 19 2011 edition.
Growth issues
The rapid expansion of the iron ore sector undoubtedly presents many opportunities for businesses in WA.
About $40 billion is being invested in projects currently being developed in WA and a further $30 billion is earmarked for projects at an advanced stage of evaluation (see attached table on 'Big Spenders'). The vast majority of this will be spent in WA, with engineers and contractors picking up a big chunk of the work (see Engineers ride the wave of investment).
But the growth is not without its issues. The surge in resources investment is adding to labour supply tightness and cost pressures, which have resulted in more cost blowouts on several projects.
It is also part of a broader macro-economic trend that has pushed up the value of the Australian dollar; these trends make it harder for local manufacturers to compete.
The strength in iron ore has also disguised the relative weakness in other parts of the mining industry.
Take out a couple of mega-projects, like BHP’s Worsley Alumina expansion and Rio Tinto’s Argyle diamond mine development, and the rest of the mining industry looks almost anaemic (see Rare earths, specialty metals and uranium).
Rio stays number one
Rio Tinto is the state’s largest iron ore producer, and current developments will keep it that way.
Its Pilbara operations have a capacity of 225mtpa and the company said last month it is on track to lift capacity to 283mtpa by the second half of 2013.
Its next step will take it to 333mtpa by the first half of 2015. This expansion is subject to a formal decision early next year, but that is considered almost a fait accompli, in light of Rio’s recent decision to spend $US676 million on early works and procurement.
Rio will not be stopping at 333mtpa; it has a number of studies underway on mine, rail and port projects to lift production further and, like most other miners, is designing infrastructure to accommodate future growth.
In planning for growth, Rio has one very clear advantage over its rivals; its port at Cape Lambert is much easier to expand than other existing ports (like Port Hedland and Geraldton) and much cheaper than proposed new ports (like Anketell Point or Oakajee).
Its current plans will lift the capacity of Cape Lambert to 183mtpa; adding extra berths could take that figure to as high as 283mtpa.
The capacity of Rio to sustain long-term growth was shored up last November, when the company reported that its mineral resource base had expanded by 2 billion tonnes to 16.4bn tonnes.
Rio’s chief executive iron ore and Australia, Sam Walsh, said the company was planning 3.9 million metres of exploration drilling in the next five years, which was more than the total drilling it completed in the past 10 years, and was “a program unprecedented in the history of the iron ore business”.
BHP looks to port
BHP’s production reached a record annualised rate of 155mtpa in the June 2011 quarter and the group is looking to take that figure to 240mtpa by the second half of 2014.
Its current developments include the Jimblebar mine and two extra berths and shiploaders at Port Hedland, which will fill its capacity allocation at Port Hedland’s cramped inner harbour.
For BHP to expand beyond 240mtpa, it needs access to more port facilities, and that most likely means an outer harbour development at Port Hedland.
BHP has already started the environmental review process for its outer harbour development, which involves construction of a large finger wharf into deeper water. The project is likely to cost more than $US10 billion, but to date the company has made no commitments.
Fortescue won’t slow down
The growth achieved by BHP and Rio in the Pilbara is impressive, but arguably Fortescue has achieved even more.
From a standing start a few years ago, the company in recent months hit an annualised production rate of 55mtpa, using integrated mine, rail and port developments.
Not content with that, the company is audaciously pursuing a target of 155mtpa by 2013, at an estimated cost of $US8.4 billion.
A few numbers illustrate the scale of its expansion: the operations village at its Christmas Creek mine is being expanded to accommodate 1,600 workers, the construction camps at its Solomon mining hub will house 1,500 workers and it is ordering 1,750 extra ore wagons.
It is also building new wharves at Port Hedland, close to where Gina Rinehart’s Hancock Prospecting and North West Infrastructure (representing several mid-cap miners) also plan new wharves to support their iron ore projects.
Market watchers agree that Fortescue will reach its 155mtpa goal, though there are questions over whether it will complete the project on time and on budget. Once Fortescue reaches that goal, the company will hit the same growth barrier as BHP – lack of port capacity.
Anketell dispute
That’s why Fortescue wants to develop a new port at Anketell Point, near Cape Lambert. This would link, via another new railway, to its proposed Western Hub mines and its expanded Solomon Hub mines.
However, it’s not the only company to have seen the potential of Anketell Point.
Perth company Aquila Resources, through its joint venture with international resources group API, has earmarked Anketell Point for the West Pilbara iron ore project.
Aquila is much more advanced than Fortescue with its planning. The Environmental Protection Authority last month recommended approval for its mine and rail facilities. A definitive feasibility study is due to be completed in a matter of weeks.
With backing from major steel producers Baosteel and POSCO, Aquila has also talked up its ability to fund the development in a timely manner. It is targeting first ore on ship in late 2014 and says its port development would be fully scaleable to accommodate other users, such as Fortescue.
Fortescue, by contrast, says its track record makes it the best party to proceed with the port development.
Mr Barnett is likely to be the final arbiter, and he has hinted that a third-party developer may be the best option, in light of the issues at Oakajee, where one of the mining proponents is also the preferred port developer.
“There are lessons to be learnt from the Oakajee experience,” Mr Barnett said recently. “I don’t want to see conflicts of interest in the way that Anketell is developed.”
Magnetite movers
Aside from the ‘big 3’ producers, the largest projects underway focus on the development and processing of magnetite ore (see Magnetite players push fledgling status to government, and value to steel sector).
Citic Pacific seems to be finally inching closer to completion of its giant Sino Iron project, located south-west of Karratha, after several cost and time blowouts.
Karara Mining – jointly owned by Gindalbie Metals and Ansteel – is also progressing its self-named project in the Mid West. It has already started work on expanding the capacity of its project and insists the existing port at Geraldton will be adequate to meet its foreseeable needs.
Asia Iron is likely to be next, with its $2.4 billion Extension Hill magnetite project.
Engineering group WorleyParsons is working on an implementation study, which is due to be completed in January, with construction scheduled to begin soon after.
The project will use a slurry pipeline to convey the iron concentrate to Geraldton, in contrast to other projects that use rail lines.
Mid West
Further large-scale developments in the Mid West beyond these, hinge on completion of the new port at Oakajee, and associated rail links.
The project proponent, Oakajee Port & Rail, completed feasibility studies in July on a 45mtpa port development.
It said the studies confirmed the viability of the project, subject to one very large proviso; that it negotiate agreements with its three foundation customers, Sinosteel Midwest, Karara Mining and Crosslands Resources.
Those negotiations are proceeding, and are likely to result in the project owners – Mitsubishi and Murchison Metals – sharing equity in the infrastructure developments with some of the Chinese-backed miners.
