Australian Financial Review
1 September 2010
West Australian iron ore magnate Gina Rinehart has warned that Australia’s advantage as a low-cost supplier of the steelmaking material is ebbing as miners focus on newer prospects in West Africa and freight rates fall.
Ms Rineheart, who is executive chairman of the privately held Hancock Prospecting, applauded Rio Tinto’s decision to approve a $US1.6 billion ($1.8 billion) expansion of their Hope Downs joint venture in the Pilbara, to which her company will contribute $757 million.
The additional 15 million tonnes a year of iron ore production at Hope Downs will replace declining output at some of Rio’s ageing operations and allow it to boost its overall iron ore projections to 330 million tonnes a year by 2015.
But Ms Rineheart said Australia must do more to stay competitive with emerging mining destinations given the increasing emphasis major companies were placing on iron ore exploration in West Africa.
“Australia has never had to face this competition before from such low-cost countries, and for decades Australia has relied upon protection against its high costs by way of a location ‘fright advantage’ given its proximity to Asian markets,” she said in a statement.
Xstrata launched a $428 million bid for locally listed Mauritanian iron ore hopeful Sphere Minerals last week, and has an option over an early-stage project in the Republic of Congo.
Rio and Brazilian miner Vale are exploring for iron ore on the Simandou tenements in Guinea, while BHP Billiton owns the Nimba project in Liberia and is in talks with ArcelorMittal to combine their West African iron ore interests.
Ms Rineheart said that the construction of much larger ore carriers in the 400,000 tonne dead-weight category and an increased capacity to handle bigger ships in the Panama Canal by 2012 would erode Australia’s geographic advantage of being closer to China.
Iron ore freight rates have fallen substantially since their 2008 peak, and Citigroup analyst Alan Heap said they would probably stay depressed as new vessels were built.
“The impact of sustained lower freight rates is to improve the competitive position of Brazilian shipments relative to Australia,” he said. Mr Heap also said the size of potential new supply from West Africa made the projects in that region of “great significance”.
Rio signed an agreement with Chalco in July that will allow the Chinese company to earn a 45 per cent stake in the project in return for investing $US 1.35 billion. Rio is seeking to produce at least 70 million tonnes of high-grade iron ore from Simandou.
Meanwhile, expansion costs in the Pilbara are rising. The $US 109 a tonne capital costs of the Hope Downs expansion – or $US 138 a tonne for Rio’s share – was steep in absolute terms, but particularly so because it was needed just to sustain current production rates, Macquarie Equities analyst Lee Bowers said, “It raises the broader question as to whether the market generally is incorporating sufficient sustaining copex for the Pilbara majors in the longer term,” he said.
By Jame Freed