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China sees gold lining in Australia iron ore projects

SYDNEY (Reuters) - Chinese steel producers are increasingly turning to Australia’s magnetite iron ore sector, pouring in funds to explore and develop mines once considered uneconomic as they nurture new supply sources.

If the trend snowballs it could cut China's reliance on giants Rio Tinto RIO.AX RIO.L> and BHP Billiton BHP.AXBLT.L, a critical move as the duo pursue a controversial iron ore merger that steel makers fear will create a near-monopoly in Australian material if left unchecked.

China has been mining and processing magnetite iron ore for decades, building up a wealth of knowledge and expertise in the area. This helps explain why overall investment in the Australian magnetite sector of around $10 billion (6.5 billion pounds) so far is set to increase.

A free fall in hematite iron ore prices, which lost 40 percent over the past three months as overall steel production recoils in China, has done little to sate appetite, with investors taking a longer-term bullish view.

“If you’re a Chinese steelmaker and you want a direct say in how much iron ore you get, the magnetites are the best option because they offer ground-floor exposure at relatively low cost and include offtake agreements,” said Eagle Mining Research analyst Keith Goode. “It’s not something the big boys can offer.”

Firms such as Baosteel 600019.SS, Anshan Iron & Steel Group (Ansteel) 0347.HK, Sinosteel, Citic Pacific Mining 0267.HK, Shagang, China Metallurgical Corp and others are backing projects that promise to deliver 25 million tonnes over the next two years from only 3.3 million now.

CHINESE DEPOSITS FACE DEPLETION

Chinese steel mills have long fed on magnetite ores from once-abundant domestic deposits now facing depletion, while the focus in Australia has always been on plentiful supplies of hematite ores.

Magnetite, which accounts for just 1 percent of Australia’s total iron ore production, has lower iron content -- around 36 percent versus 61 percent for hematite -- and must be upgraded, typically into pellet form, at an added cost of around $15 per tonne, to make it suitable for steel making.

By contrast, hematite is known as “direct shipping ore” or “DSO” because it is mined and beneficiated via a simple crushing and screening process before export.

But in the last few years iron ore of any type has turned to gold for anyone able to mine it and transport it to a port for a relatively short journey to Asian shores.

This quarter alone, the fifth-biggest iron ore miner in Australia, Grange Resources GRR.AX, was able to raise magnetite iron ore pellet prices by 107 percent and forecasts are for pellet prices to continue to rise.

For now, all but a fraction of Australia's iron ore is still mined in the established Pilbara hematite iron belt, where Rio, BHP, Fortescue and Atlas Iron AGO.AX are forecast to produce a combined 440 million tonnes this year.

PURPOSE-BUILT PORTS

Traditionally, there has been minimal seaborne trade and steel mills were often built beside magnetite mines, but Chinese firms are displaying a willingness to fund new Australian ports purpose-built to service new magnetite mines.

Recent start-up Gindalbie Metals GBG.AX has a contract to deliver nearly 900 million tonnes of iron ore from its Karara magnetite deposits to China's No. 2 steelmaker, Ansteel, over three decades.

Its first shipment of 10 million tonnes is due in 2011 via the Indian Ocean port in Geraldton.

Last month, the China Development Bank provided $1.2 billion in loans for studies of a project for a second larger port to maximise production.

“The development of new ports is opening up vast opportunities that did not exist before,” said Garret Dixon, managing director of Gindalbie.

“For Ansteel, Karara becomes a strategic long-term cost effective source of iron ore for their expanding steel making facilities.”

There are more than 20 identified magnetite deposits and prospects in Australia, making up an estimated 4.7 billion tonnes of the resource in Western Australia, 1.6 billion tonnes in South Australia and 700 million tonnes each in Tasmania and Queensland. Each state has attracted Chinese magnetite investment.

“The Chinese steel companies understand and appreciate the potential for Australia’s magnetite industry to grow into a major force,” Gindalbie’s Dixon said.

“We represent a real ground-level opportunity for long-term supply.”

Editing by Ed Davies and Clarence Fernandez

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