China’s overseas iron ore mining investments have under performed and met only a fraction of the country’s annual ore requirements, leaving mills vulnerable to cost pressures on escalation in imported iron ore prices.
On Aug 19, the spot iron ore fines Fe 62% cfr China fines index touched $128.80/dmt, up by about 37% from level prices in early-January 2020, tracking robust demand from mills which have ramped up output since the lockdown ended in March.
The root cause of China’s vulnerability to iron ore sticker shock was the underperformance of its overseas investments. If the output of these overseas mines had been in line with projections, the industry won’t have to worry about the escalating price of iron ore each year.
China started investment in overseas mines from around 2005 as demand for iron ore shot up, leading to sharp escalation in procurement costs.
When Chinese companies started investing in overseas mines, iron ore price were already high and the mines were expensive to acquire, hard to access and with inferior ore quality. The average cost per tonne of iron ore in mines invested by Chinese mills is around $100/t, which is not economically viable, considering iron ore prices lingered below this level in recent years.
Total production capacity of iron ore projects in which Chinese enterprises have invested up to 2013 was 98.72 billion tonnes, though resources of only 270 mnt were entitled to be supplied to the Chinese owners. Annual supply from these mines was around 65 mnt in 2019, around 6% of China’s total imports. Similar investments by Japanese and European companies yield around half of the iron ore requirements of these regions.
The low output of China-invested mines is mainly because of quality mines being already acquired long before Chinese investors showed interest in iron ore. Mainstream global miners have operational costs of around $30-40/t on a FOB basis, hold titles to easily accessible mines with iron ore quality mostly above 55% Fe with low impurities.
China’s iron ore output from overseas investments may finally bear fruit with the development of the Simandou mine located in Guinea. A consortium headed by China’s Weiqiao group plans to reach an output of 60 mtpa in 2026 and hit full capacity of 110 mtpa gradually.
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