Mega miners tighten iron grip as Australia ports stall
* Iron ore price drop, funding obstacles stall key port, rail plans
* Majors plough on to add 355 mln tonnes a year iron ore capacity
* Lenders set tough iron ore price hurdle
* Delayed projects could run into iron ore surplus
By Sonali Paul and Rebekah Kebede
MELBOURNE/GERALDTON, Australia, Dec 19 (Reuters) - A new deepwater port on Australia's Indian Ocean Coast was supposed to be the showpiece of the country's decade-long mining boom and open up a huge new iron ore belt to export to Asian markets.
But twice in the past 15 years, plans for the port on a scrubby stretch of land 400 km (250 miles) north of Perth have collapsed, most recently last month, when Japan's Mitsubishi Corp put the $6 billion project on ice due to spiralling costs and falling iron ore prices.
The move will keep a new chunk of iron ore from the Mid West region of Western Australia off world markets and further cement the stranglehold of Rio Tinto and BHP Billiton , the world's No.2 and No.3 producers, who dominate the iron-rich Pilbara region further north.
The port of Oakajee near the town of Geraldton was meant to be the point where a spaghetti junction of rail lines serving dozens of new mines converged, dumping millions of tonnes of iron ore into waiting freighters bound for Asian steel mills.
Without it, more than 13 billion tonnes of iron ore resources, nearly one-fifth of Australian reserves, will remain on the drawing board, including Mitsubishi's Jack Hills expansion, Sinosteel Midwest's Weld Range, and Asia Iron's Extension Hill.
Hit by weaker iron ore prices, projects like Oakajee and the mines to back it up have become too expensive in Australia where there are some $270 billion of resource projects underway, all competing for workers, equipment and materials.
"The cost structure of these projects has gone through the roof. Just on economics, a lot of these have become too hard to justify," said Darko Kuzmanovic, a resources fund manager at Caledonia Investments.
As projects languish, Rio, BHP and Australia's third-biggest iron ore miner, Fortescue Metals Group, are ramping up output at their mines which have the margins to stay profitable even with prices down a third from last year's peak.
RAIL, THE HOLY GRAIL
Iron ore is Australia's single-largest export, worth $62 billion last year. The vast majority is shipped to Asia through a handful of ports in the Pilbara served by a few rail lines.
The size of Spain with a population of barely 50,000, the Pilbara, which means "dry" in local Aboriginal languages, is home to the largest known iron ore deposit on earth.
But new iron ore producers face a big task to break the grip of the big miners in the Pilbara, where the majors' profit margins are higher even than iPhone maker Apple Inc.
The big advantage for Rio and BHP, besides the high quality of their ore, is they have their own rail lines, which they fully control and don't want to share.
Fortescue is the only other firm to have its own iron ore rail line in Australia, after founder Andrew "Twiggy" Forrest snapped up iron ore assets a decade ago, lined up Chinese customers who were trying to break the grip of Rio, BHP and top producer Vale, and found lenders to back his $15 billion bet on Chinese demand for steel.
It may be too late for aspiring producers aiming to become the next Fortescue, given Chinese steel growth has slowed, iron ore prices have tumbled and the global outlook remains rocky.
"It's no secret that the current economic environment is creating challenges in the mining sector -- with many WA (Western Australian) companies and producers scrutinising their capital management," Oakajee Port and Rail CEO John Langoulant said last month after freezing the project in which A$700 million ($740 million) has already been invested.
Fortescue may control the future of several fledgling miners, including Atlas Iron, Brockman Mining and Flinders Mines. It said this week it was in talks that could lead to a spin off of its port and rail assets into a separate business, which could allow access to its rail line for some smaller miners.
Flinders has struggled to secure rail and port access for its $1.1 billion project, with its shares down 75 percent this year after Russia's Magnitorsk Iron & Steel Works (MMK) dropped a takeover bid.
"What Flinders needs is a timeframe. We've got a big block of iron ore in the Pilbara ready to go. It's very frustrating," Managing Director Gary Sutherland told Reuters.
Billionaire Gina Rinehart's Hancock Prospecting is trying to build its own rail line as part of its $10 billion Roy Hill project. It launched its debt raising programme this month, aiming to start shipping iron ore by September 2015.
But even with strong Asian partners including South Korea's POSCO and Japan's Marubeni Corp, the project is already at least a year behind schedule and far from guaranteed to secure the $7 billion loans it needs to go ahead.
Many iron ore miners see iron ore prices averaging around $100 to $120 a tonne over the next few years. Iron ore prices peaked at $192 a tonne last year and fell below $90 this year.
But lenders are more conservative. One, who declined to be named, said banks are looking for iron ore projects that will be robust at an average of $80 a tonne.
At that price, Rio Tinto and BHP are still very profitable, with their costs for ore delivered to China below $50 a tonne. Fortescue and other smaller miners would struggle at that price.
Freight firm Aurizon could offer a new option for infrastructure in the Pilbara. In a precedent for the iron ore belt, it is studying building a rail line for Atlas Iron and Brockman to Port Hedland, which ships nearly half of China's iron ore imports a year.
"I guess it's a first in the Pilbara to get two miners to cooperate, so we should get a prize for that," Aurizon strategy and business development chief Ken Lewsey told Reuters.
But it does not appear to offer a quick solution, with the parties now considering staging the project.
While some developers at least have ports to ship from, others such as Aquila Resources and Mitsubishi, Metallurgical Corp. of China Ltd (MCC) are battling to secure access for rail and port projects.
Aquila had hoped to start mining in 2014 from its West Pilbara Iron Ore API joint venture with U.S. investor AMCI Capital and POSCO. The mine can't be built without a rail line and will struggle without development of the Anketell Point port.
"We are working very hard to make sure it's not the next one on ice," Aquila executive chairman Tony Poli told Reuters after the group's recent annual meeting.
But Anketell's future is in doubt. MCC put on hold its Cape Lambert project this week over rising costs. Along with serving MCC, Aquila Resources' API joint venture and Fortescue were supposed to use the port.
Anketell had been proposed as a 350 million tonnes a year port to be built in stages. The state is eager to see it go ahead and is buying up land for the port, but has yet to approve the project, having been burned by shelved plans at Oakajee.
A CARTON OF BEER
In 1996, a company called Kingstream proposed a huge port and a steel mill at Oakajee with backing from a Taiwanese steel company, reviving an idea first mooted in the 1970s.
The port was going to shake up the sleepy town of Geraldton, and, most importantly for locals, like real estate developer Ian Wheatland, attract workers.
Wheatland made big bets on housing lots that turned sour as Kingstream fell victim to the Asian currency crisis.
"I maybe made a carton of beer off of it," laments Wheatland... (It) was a complete failure."
The state revived hopes for Geraldton in 2008, selecting Mitsubishi and miner Murchison Metals for Oakajee. Three years later with no ground broken, Murchison conceded it was too weak to foot its share and sold out to Mitsubishi.
After efforts to bring in a Chinese partner failed, it was clear the idea was doomed and Oakajee was shelved in November.
The state concedes that final approval for Anketell will hinge on future demand for iron ore.
"We envisage within the next five years, but that depends on the condition of the iron ore market," Western Australia Premier Colin Barnett said in an email to Reuters.
By then, expansions by Rio Tinto, BHP and Fortescue will have added 355 million tonnes a year of capacity, nearly doubling the iron ore those three companies produced last year.
With iron ore demand growth slowing, that could put the market in surplus by 2016, analysts warn, casting further doubt on the prospect for small miners.
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