Record World Iron Ore Production Tracks Economic Pick Up and Chinese Consumption

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). With the prospect of tightening global supplies over the next twelve months, iron ore price increases of around 9% are now general in producer countries. Although, the scope for expansion of iron ore mining is said to be limited, companies in the industry are investing in new mines, where new ore bodies can be located and putting in more efficient ore processing and transportation plant. Brazil's CVRD (NYSE:RIO) (Rio de Janeiro, Brazil) the world's largest producer and exporter of iron ore has budgeted $576 million for investments in iron ore production in 2003. In addition to removing infrastructure bottlenecks, CVRD is investing in the Fabrica Nova and Brucutu iron ore mines in southern Brazil and Carajas N5 in the north of the country.

World production of iron ore topped the one billion tons mark for the first time in 2002, with a total production figure of 1,008 million tons. This represented an annual increase of 7.5% riding on the back of a 6.2% increase in world crude steel production.

The international trade in iron ore reached a record level of 512 million tons in 2002, representing an annual increase of 7.8%. Japan continues to be the world's largest iron ore importer, having signed an 8.9/9% price pegging deal with BHP Billiton (NYSE:BHP) (Melbourne, Australia) earlier this year. China will surpass Japan in 2003, if the present trends continue to the end of the year, reports 'The Iron-Ore Market 2002-2004' which is published by the Trust Fund Project on Iron Ore in collaboration with the Raw Materials Group under the auspices of UNCTAD. It says that Japanese imports increased by 2.2% in 2002, while Chinese imports grew by more than 20% and passed 100 million tons for the first time. China and the Republic of Korea account for 55% of world imports.

Fabio Barbosa, CFO of CVRD, recently told market analysts that demand would continue to outstrip supply in the world iron ore market into 2004. CVRD is forecasting the international trade will total 510 million tons in 2003 and that suppliers will not be able to meet that total. China, said Barbosa, is the main reason for the explosion in demand for iron ore and will need 136 million tons in 2003, which is a 26% annual increase.

The Raw Materials Group report says that the balance between domestic and imported iron ore supply in China is crucial to the development of the overall market. The survival capacity of the Chinese small-scale iron ore industry looks positive and will most probably increase output as will the major iron ore mines in the country. This may curb demand for imported ore for domestic consumption. In the longer term, it will be difficult for China to continue to expand iron ore production at reasonable costs, given the quality of existing resources and the infrastructure developments that new capacity will require.

Reports from Russia seem to bear out this forecast with iron ore exports to China slowing down and being taken up by domestic demand from steel makers. Iron ore exports grew 24% in the first quarter of 2003, but by the end of the year export growth is forecast at 8.6% on a total production of 87 million tons. Prices for ore concentrate have increased 9% compared to 2002 and prices for pellets are up around 10%.

Canadian and US production is still below 1990's levels although current production figures are positive. Brazil's production increases by 15% to a record of 239 million tons with exports growing 9.2% to 170 million tons. Australia is the second largest producer at 187.2 million tons. Increases were also recorded in China, India, South Africa, Sweden, and Venezuela reports the Raw Materials Group.

The overall outlook for the iron ore market through 2004 will depend on world economy pickup, another 100-115 million tons of production coming on stream, world steel consumption increasing at a rate of over 4%, the Chinese juggernaut maintaining growth rates and of course the degree of exuberance the presidential election year injects into US steel production and industrial consumption.

The 2002-2004 report points out that price increases agreed this year look less impressive when expressed in the currencies of exporting countries rather than in a strongly depreciated US dollar.

Further increases in ore prices are possible if all the above factors, including a classic imbalance of supply and demand, are considered.