With China soon to be importing 1.3 billion tonnes of iron ore each year, twice as much as at present, mining companies in Brazil are preparing to share in the bonanza. Work on building two large new mines will start soon, expansion works at two big existing mines have been resumed and dozens of smaller mines are being opened. If all goes according to plan, at least 500mt (million tonnes) of ore will be exported from Brazil each year in five or six years’ time, compared with the 300mt to be shipped this year.
Work on opening a new mine at Vales’ Carajas complex, suspended last year when demand slumped, has resumed. About 120mt a year will be taken by rail to the port of Ponta da Madeira in 2012, compared with close to 90mt last year. Apart from the extra million tonnes exported last year by Samarco, jointly owned by Vale and Anglo American and the 2mt extra exported from Anglos Santa mine in Amapa state, less was shipped through all other Brazilian ports last year as in 2008, with the exception of Ponta da Madeira. Twenty million tonnes less was shipped by Vale and associated ompanies through the Tubarao terminal in Espirito Santo state, following the closure of several high-cost mines in Minas Gerais state.
Work will start almost immediately on Anglo’s new mine in Minas Gerais state, and about 26mt are expected to be shipped each year from a new port to be built at Acu, in Rio de Janeiro state by 2012. Ore will be taken to the coast in a 520km-long slurry pipeline. Anglo expects its new mine to be producing 80–90mt by 2016, when the mine will be the world’s fifth largest. This will result in Anglo being responsible for about 10% of the transoceanic ore trade by 2016, compared with the company’s present 3% share.
The other brand new mine, also in Minas Gerais state, has been bought by the Chinese-owned Honbridge Holdings from Brazil’s Votorantim giant, which dominates the cement, aluminium and pulp industries in Brazil. Up to 25mt will also be taken by pipeline from this mine in slurry form to a new port to be built close to Ilheus, in Bahia state. The CSN steel company is to raise output at its Casa da Pedra mine in Minas Gerais state from the current 16mt to 55mt by about 2012 and the extra ore will be taken by rail to either Rio de Janeiro or Guaiba port.
At least half a dozen new steel mills will be built in Brazil in the next ten years, taking the country’s steel-making capacity to close to 60mt, almost double the present total. But rather than relying on ore bought from Vale, as they now do, most of the companies concerned, such as Mittal-Arcelor, Usiminas and Gerdau, plan to open mines of their own, rather than have to rely on Vale for supplies. Although the quality of Brazilian ore is higher than most of that found in Australia, and much higher than that in India or China, the long journey to China, now firmly established as the world’s leading importer of iron ore as well as maker of steel, has been a serious handicap for Vale and the other ore exporters in the past few years. Freight rates have frequently been as high as the cost of a tonne of ore, about $80 per tonne. To overcome this problem, Vale has ordered twelve 400,000dwt-capacity ore carriers from yards in China.
Following pressure from president Lula, to step down after eight years in power in January next year, and who is trying to pave the way for his chosen successor by introducing populist measures, Vale has agreed to order some more costly ships in Brazilian yards, which will increase demand for steel. It is still not quite clear how the price at which ore is sold will be fixed from now on. For the past 40 years, prices have been agreed at secret negotiations between the world’s three large ore producers, Vale, Rio Tinto and BHP and the leading steel companies in Japan and Europe, the ‘benchmark’ system. In theory at least, ‘benchmark’ contracts remain in force for at least a year, although many are for far longer than that. But with demand often greater than supply, the ‘spot’ price of ore has sometimes risen to twice the benchmark price in the past few years.
This has encouraged some ore companies to propose that the benchmark system should be scrapped, with all deals done on the spot market in future. A worry is that it costs many billions of dollars to open a brand new mine and build the associated infrastructure.
Without the guarantee of fixed prices for ore for a set period, many such investments might not materialize. Speculators looking for large short-term profits, as well as banks eager to take a cut, clearly prefer ‘spot’ prices, where fortunes can be made for little effort. But the canny Japanese, as well as many steelmakers in China and most executives at Vale are not happy about the proposed switch. They note that spot prices can tumble to well below the ‘benchmark’ price if things suddenly turn sour. For the time being, there is a deficit of somewhere between 20–60mt between supply and demand, which has caused prices to remain high. But concern is growing that the recent restrictions on bank lending in China could take the wind out of the current infrastructure boom there. If that happens, ore prices could fall as fast as they have risen.