Record ore prices this year, are bringing high profits to mining companies. But will such prices persist, or are they an anomaly?
Mining companies the world over are celebrating the record prices of iron ore. This is allowing companies such as Vale, Anglo American and Rio Tinto to reduce debt levels and increase investments and profits. The price of Brazil’s high quality ore, which contains about 65% of mineral per tonne of rock, which makes it extremely popular, passed the $225 per tonne mark in April. Two important questions now arise, however. What caused the ore price to surge and what happens next?
The reason for the record price rise, is by far the easier question to answer. On the one hand, supply has fallen — partly due to production restrictions in many countries, caused by the Covid pandemic — while unusually wet weather in Brazil delayed shipments to ports. The sharp increase in demand has been largely caused by the unexpectedly fast recovery of China’s economy, one of the countries in the world least-affected by the pandemic.
This has seen demand for Chinese made goods, both on the domestic market and for export, recover much faster than anticipated. The amount of steel produced in China this year is on course to be at least 15% higher as in 2,020. Some analysts suggest that the current strong demand for ore in China is a repeat of what happened in the early 2000s, indicating that a ‘super cycle’ in demand for all commodities is under way once more, as China embarks on a new round of infrastructure investments. But Vale’s chief executive, Eduardo Bartolomeo, does not agree. Bartolomeo sees the present surge in demand as being because of the faster than expected recovery of the economies of most of the other industrial countries, not least the United States. US president Joe Biden seems to have decided that the best way to prevent a Republican victory at the next election, something which could involve the return to power of Donald Trump, is to make massive investments in infrastructure renewal, and by this means to attract support for his government.
This policy for growth is likely to be copied by several other Western nations. Many of these have also decided that a return to traditional fiscal policy, involving balancing the books, is not the answer when the economies of so many countries have had to be bailed out by a increase in government borrowing. So for many reasons, ore prices can be expected to fall only slowly, at least in the short term. Will both exporters and importers be affected to the same extent? Or will other factors, notably the growing concern about the impact of climate change also play a part. Evidence for this is now growing fast, and could impact the production and export of ore, fundamentally changing the market in the future.
One important sign of the times is the growth in the use of electric arc furnaces, which use scrap metal as their raw material, rather than ore and coal. Although scrap is now only responsible for an average of about 30% of the steel made worldwide, the percentage of scrap used varies greatly. It ranges from a low of only 12% in the case of China, to a massive 85% in countries in the Middle East, where electricity can be produced cheaply. Italy too is fairly near the top of the scale, with 82% of the steel produced there made from scrap. In the USA, 68% of all the steel made there also uses scrap.
Cheap electricity is not the only reason for the increased use of scrap in steel making. The other is the greater availability of scrap itself. So it is not surprising that in mature economies such as that of the United States, as well as most countries in Western Europe, a significant proportion of their massive fleets of automobiles and trucks, as well as domestic appliances, are being scrapped each year. Even many elderly buildings are now being demolished, to be replaced by more modern ones, all of which is guaranteeing a steadily increasing supply of scrap.
Although China is now the world’s largest market for motor vehicles, the fleet there is still relatively young. So it will be many years before the scrap supply in China is abundant, and much of what is used, now has to be imported. But as consumer durables in China begin to age, more scrap will eventually be available there as well, and less ore will soon be needed.
China is also one of the countries most severely affected by pollution and the government there is worried about it. Officials have been pressing for many of the elderly mills, where blast furnaces are now used, to replace these by less polluting ones using scrap. At the same time as the demand for scrap is rising, many the remaining older generation of mills, seeking to pollute less, are switching to using higher-quality ores, such as those produced in Brazil and Australia. The best of these ores can demand premiums of up to 35% higher than the average price.
High-quality ores are easier to process, and are less polluting than lower-grade ores. As pressures increase for all countries to take climate change issues more seriously, so does demand for higher quality ores. This should ensure that countries such as Brazil, as well as Australia, will see demand for their ore remaining at current levels for much longer than producers and exporters of low quality ores such as India will do.
Countries whose reserves of higher-quality ores are shrinking fast, notably in China itself, which now imports more than 60% of all the iron ore traded each year world wide. Although Vale’s ore exports have fallen well behind expectations in the past couple of years, and an output hoped to reach 400mt (million tonnes) by now, has not happened, it seems likely that demand for Brazil’s ore will remain strong for some time, notably because of continued demand from China, at least for a few more years.
Whether the company will expand production at its new Carajas mine to the planned 450mt, remains to be seen. It seems inevitable that total demand for iron ore will start falling soon, as the impact of global warming intensifies, and more mills switch to using scrap. The supply situation is further complicated by the fact that mining companies themselves are coming under increasing pressure regarding their contribution to global warming and climate change. While a decade ago, companies such as Vale faced muted criticism for allowing dams such as that at its Sobradinho mine to deteriorate, and collapse, these days such failures, which cost more than 100 lives, are attracting much more attention. Vale is also lagging behind the Australian mining companies such as Rio Tinto, Anglo-American and Fortescue, on Dow Jones’s ‘Sustainability Index’. The Brumadinho incident has already cost Vale several billion US dollars in compensation.
Another growing problem is the increased amount of criticism of mining by indigenous people. Several places where Vale operates in Amazonia, are in areas where Indians have prior claims. These includes stretches of the railway which takes ore from the Carajas mines to the port of Itaqui. In the past, protests by Indians have halted trains, and this can be expected to increase, as worldwide concern about the rights of indigenous people rises, so Vale can be expected to likely to attract further unwelcome attention from this source.
Whatever the long-term prospects for iron ore are, for the time being Vale is not the only company in Brazil planning to push up its production. Anglo American, whose 157km-long slurry pipeline was damaged by an explosion a couple of years ago, now has plans to increase exports it its mine from the present 24mt a year, to 30mt in a couple of years’ time.
Brazil’s leading steel maker, the CSN company, also plans to increase the amount of ore it exports each year, to 40mt, at a time when it is selling various assets to pay off debts. The production and export of Brazil’s pig iron, most of which comes from Minas Gerais state, continues to do well. Mills there have been working at 85% of capacity, while 67% of the production of its 46 smelters is now being exported to China. Pig iron prices rose to $500 per tonne in 2020, compared with $300 a tonne a year earlier.
Dry Cargo International