Commodity boom lifts Russia's iron belt

By Robin Paxton

GUBKIN, Russia (Reuters) - Soviet geologists were looking for oil when exploring this region 500 km (315 miles) south of Moscow.

Instead, they unearthed Europe's largest iron belt. Legend has it the pit blasted into the fertile soil is big enough today to fit the world's population twice over: it has certainly helped make billionaires of its three Russian owners.

Global prices for iron ore, a crucial ingredient in steel, have quadrupled in the last five years as China -- producer of a third of the world's steel -- devours ever more raw materials.

Russia, second only to Saudi Arabia as an oil exporter and supplier of a quarter of Europe's gas needs, also holds some of the world's largest metals reserves. It produces a fifth of the world's nickel, and only South Africa has more gold reserves.

Russia is the world's fifth-largest iron ore miner, with a 6 percent share of global production. While its output lags China and top exporters Australia and Brazil, Russia's reserves outrank them all, promising a long future for iron mining.

Rio Tinto this week secured the highest annual price rise in a decade when it agreed to sell its ore to China's largest steel maker, Baosteel, at up to 96.5 percent more than a year ago.

"The margins in this industry are certainly enough to encourage existing producers to expand and new producers to come in," said Jon Bergtheil, head of mining equities at JPMorgan in London.

Although most of Russia's iron ore is for local use, its largest mines have some capacity for export and there's plenty more ore in the ground to feed expansion plans.

"We have enough left for more than 100 years. In principle, our reserves are unlimited," Nikolai Dronov, the chief engineer at the Lebedinsky mine, said at the edge of the pit.

Nearly half a km below, a fleet of 28 trucks built by U.S. firm Caterpillar Inc and Russia's Kamaz fills up with rocks for the long, winding drive to the surface.

Lebedinsky is part of the metals empire of Alisher Usmanov, one of Russia's 20 richest men and owner of a stake in English soccer club Arsenal. Metalloinvest, the firm he founded and half-owns, plans a public share offering in either New York or London this year.

The UK mining index, which includes most major mining groups, rose 50 percent last year compared with 4 percent for the FTSE 100 as a China-fuelled boom pushed commodity prices to records. It is up over 15 percent this year.

Usmanov and Vladimir Potanin, part-owner of Norilsk Nickel, are in talks to swap assets in a move to create a Russian mining champion on the scale of global leader BHP Billiton.

Metalloinvest would contribute the iron: its two mines supply 40 million tonnes of iron concentrate per year, or about 40 percent of Russian production, and the company plans to increase this by 50 percent within the next seven years.

Most Russian iron mines exist to serve the steel companies that own them: Russia is the world's fourth largest steel producer with a 5.3 percent share of world production last year.