Iron Ore

This week started with the horrible Samarco mine disaster in Brazil. Two mine dams burst and waste from tailings ponds created to service the iron ore mine flooded local villages and affected water supply within a 60-plus-mile area. The death toll has now reached eight people.

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My colleague, Stuart Burns, warned that the co-owners of the mine, BHP Billiton and Vale SA, could be in deeper water than anyone. Remember BP after the oil spill?

BHP CEO Andrew Mackenzie hopped the first flight to Brazil to put as best a face as he can on the response. Yet the Brazilian government has already set its sights on Vale and BHP as the responsible parties and literal owners of the disaster.

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Except for the well-connected in India’s iron ore and steel circles, very few know, or care, about the going-ons around Essar Steel’s proposed US iron-ore-pellet production facility in Minnesota. But in the US, it continues to hit the headlines regularly.

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At its center are two competitors — Essar and Cliffs Natural Resources. There have been over a decade of delays (accompanied with a series of controversies), but now, the Essar Steel Minnesota project, insists the company, is headed toward completion. The plant is expected to start making iron ore pellets sometime late 2016.

Minnesota Iron Ore Ship Loader

One of the many iron ore ship loaders in Minnesota. Could Essar Steel’s production facility revive the iron range? Source: Johnsroad7/Adobe Stock.

Essar plans to produce 7 million tons of processed taconite pellets a year. This may ultimately go to ArcelorMittal’s Indiana steel mill near Chicago, as well as Essar’s own steel mill in Algoma, Ont., Canada.

State Help

Essar received about $70 million in state grants and state loans after taking up the project in 2007 to build one of Minnesota’s only integrated taconite and steel mills. Read more

Was the mining accident in Minas Gerais, Brazil last week — the one that killed at least two and with 25 people who are still missing presumed dead — a disaster waiting to happen?

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Carlos Eduardo Pinto, a state prosecutor speaking to Reuters seems to suggest it may have been. Following a tailing dam failure last year in the town of Itabirito, which killed three workers, Pinto set up a task force and identified more than 200 dams that needed safety improvements.

Taller Wall Rather Than New Tailings Ponds

Since then, the Samaraco mine, jointly owned and operated by mining giants BHP Billiton and Vale SA, has increased production by a further 37% putting so much strain on the tailings pond structures that Samarco was already working on a dam wall to raise them further at the time the accident happened.

The authorities would have preferred a new structure to have been built but this would have cost more money than simply raising the existing dam higher, so it’s no surprise that, in a state where a large proportion of revenues come from the mining industry, the wall was raised rather than a new pond constructed and local authorities approved the plan. Read more

Two major iron ore miners are under pressure after a dam burst in Brazil causing widespread disaster and at least three deaths. The British steel industry is urging the EU to enact dumping curbs against China.

Widespread Destruction After Mining Dams Break

More than two dozen people remain missing days after a deadly mining accident in Brazil involving two of the world’s largest mining groups, authorities in the country said on Sunday.

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Rescue services said three people were confirmed to have died when two dams burst and engulfed a small town in mining waste, and the whereabouts of another 28 people — including 13 mine workers — remained unknown.

Brazilian media reported on Sunday that what is being called the “mud tsunami” had hit areas more than 60 miles away from the dams.

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BHP Billiton said its chief executive Andrew Mackenzie would travel to Brazil this week as the Anglo-Australian miner confronts the aftermath of the accident along with Vale SA, its Brazilian joint-venture partner. BHP and Vale own 50% each of Samarco, the independently operated iron ore miner that controlled the project in Minas Gerais state where the accident occurred late on Thursday.

British Steelmakers Want Dumping Duties

British steelmakers called for business minister Sajid Javid to insist on immediate action against Chinese steel dumping when he meets European Union economy and industry ministers in Brussels today. Britain requested the emergency meeting after nearly 4,000 of its steel jobs were lost or put at risk in October — equivalent to about a fifth of the sector’s workforce — with steelmakers and unions pinning much of the blame on China.

The Raw Steels MMI fell 5.9% to 48 points, the first time our index has ever fallen below 50 points and, of course, another all-time low.

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Steel prices continued to fall in October, stressing the risks of buying large quantities when prices look “cheap” while the market is in bearish mode.

Raw-Steels_Chart_November-2015_FNLAs with any other metal, China continues to be the main price driver. Chinese exports of finished steel keep rising. The latest figures showed a 27% increase on the year-to-date compared to the same period last year. Moreover, while exports keep increasing, production in the country hasn’t declined significantly, underscoring that the extra material is a direct result of weaker demand in China.

Declining Market-Based Production

Cheap Chinese imports combined with the glut of inventory explains the decline in US steel production. Capacity utilization fell to 71.3% in October. Adjusted year-to-date production through October is down 8% while capacity utilization is also significantly down from the same period last year. Capacity utilization remains persistently below 80% this year, hurting the revenues of American steel mills.

Not only domestically, but low prices continue to hurt steel manufacturers around the globe. In October, steelmaker Tata Steel announced 1,200 job cuts in the UK. The decision came only weeks after Sahaviria Steel Industries announced 2,200 job cuts due to the closure of one of its facilities. It is estimated that less than 50% of global steelmakers are profitable at current levels. High-cost mill closures have already taken place, but they are minimal in the context of overall capacity.

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Other than the oversupply, and the continuous lack of demand, production costs are also helping bring prices down. In October, crude oil was unable to rise, remaining below $50/barrel for the third consecutive month. In addition, iron ore prices remain at low levels and capacity expansions won’t likely help to push iron ore prices up. Total iron ore supply is estimated to increase by 105 million metric tons in 2015 with more to come in the following years, with some analysts calling for iron ore prices below $40/ metric ton next year.

What This Means For Metal Buyers

Steel prices are at very low levels but that doesn’t mean that we’ve hit bottom. Other than lower production costs, steelmakers keep producing in order to avoid job destruction and giving away market share. Hopes that demand improvements will help prices might never become a reality. Prices might have to drop further down until forcing a tide of closures.

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Iron ore mining is a bad place to be this year but, by all accounts, it’s going to get even worse. However much BHP Billiton and Rio Tinto Group talk up their book they can’t be happy with prices at $48-49 per metric ton and, yet, even a senior BHP executive, Alan Chirgwin, vice president of marketing for iron ore, says there is no light at the end of the tunnel for depressed iron ore prices, which will gradually deteriorate over the next few years before finding a new normal well below $50 per mt.

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He is quoted in the Australian Financial Review saying the price will gradually fall over the next few years before finding a new normal at the highest break-even of “a major producer in Australia or Brazil.” That, the paper suggests, would likely be either Fortescue Metals Group or Brazil’s Vale SA, which are both racing to avoid the unwanted marginal producer status. Fortescue is sitting at about $37 to $38 on break-even, while Vale is closer to $40 a metric ton.

Source AFR

Source: Australian Financial Review

It is no secret the iron ore market is suffering from massive oversupply facing deteriorating demand. In fact the same is true for all steel making ingredients, metallurgical coal is currently at $80 per mt down from $300 per mt four years ago. Read more

Last week, two major developments took place in India which are likely to impact global ore production and maybe even prices.

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Vedanta announced it has begun to export iron ore from the Indian province of Goa for the first time since mining was halted there about two years ago. Shipments started to China, one of the biggest buyers of Goa ore. India’s overall ore mining had ground to a halt over three years ago after a Supreme Court imposed ban that was subsequently lifted in phases.

Iron ore has averaged about $60 per metric ton this year. Depressed iron ore prices stabilized recently at about $55 per mt, after a long period of volatility. But Vedanta leadership is of the opinion that iron ore prices were in “freefall.”

Export Duty Falls

For some Indian miners, at least, restarting ore mining may become profitable again following India’s reduction of its export duty from 30 to 10% earlier this year on lower-grade exports of the commodity.

The other, more important development, though, is that India’s Tata Steel is reportedly reaching an agreement with New Millennium Iron Corp., its Canadian iron ore joint venture partner, to hike its stake in the JV to 94% from its current 80%.

Canadian Investments

New Millennium declined to make further investments in the JV’s projects at this time, something that Tata Steel accepted. Tata Steel will invest $401.39 million ($524.5 million Canadian) to continue as the lead investor in the JV, Tata Steel Minerals Canada Ltd.’s (TSMC). After the deal, New Millennium will end up holding only a 6% stake.

TSMC is pursuing a direct shipping ore project (export of iron ore fines) in Canada’s sub-arctic region. Shipments from the DSO project began supplying Tata Steel’s European facilities in 2013. The project has yet to be fully commissioned, but its capital cost has already increased beyond the $428 million ($560-million Canadian) announced in October 2012. Tata Steel entered into an entire off-take agreement with TSML at the project’s outset. The initial production for the DSO project was aimed at 1 million tons.

The DSO project license area contains 64.1 million metric ton of proven and probable mineral reserves at an average grade of 58.8% iron (Fe).

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Tata Steel is also reviewing its future commitment on developing New Millennium’s two other inferior grade (taconite) projects – Lab Mag and Key Mag – in Canada.

It’s been a wait of about 3 years but Vedanta’s iron ore operation in the Indian province of Goa is finally set to resume exports, mainly to China. After the monsoon ends, other miners, too, are all set to restart mining.

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Representatives of steel manufacturing mills from China’s Jiangsu province and Tangshan area recently visited Goa to discuss the modalities with officials of Sesa Iron Ore, a subsidiary of Vedanta.  Sesa Iron Ore announced the resumption of iron ore extraction at its mine in Codli, 80 kilometers south of Panaji, Goa’s Capital, and once Asia’s biggest iron ore mining site.

Resumption of Ore Extraction

The current environment clearance limit for the mine is around 3 million metric tons a year, scaled down from earlier limit of 7 million metric tons. Before the mining halt, China was the biggest market for Goa’s iron ore. The extraction activity in Goa was stopped after the state government suspended mining leases due to illegal activities. Later, the Supreme Court of India banned it until April 2014. Recently, the Goa government renewed many of the leases, paving the way for resumption of iron ore extraction.

While the Chinese may be back, in Goa at least, and with more capacity added to the overall iron ore stock, the larger question being debated by iron ore analysts and mining companies in India and around the world is – will there be a revival in Chinese demand for ore? Are they back?

What About the Majors?

Mining major Rio Tinto, for example, recently reiterated its claim that Chinese steel production would reach 1 billion tons, soon, and also forecast renewed demand for iron ore and steel from other emerging markets in the next 15 years.

Rio may still have faith in the China growth story but competitors such as BHP Billiton and Fortescue Metals Group think otherwise. A few days ago, BHP said it had lowered its expectations of Chinese steel production.

Like Vedanta’s Goa mines, a few others around the world are preparing to add to the ore supply. India’s Essar Steel, for example, is hurrying up construction in Hibbing, Minn., of a $1.9 billion mining and processing facility.

But what effect will the increase in ore supply have on the already spiraling iron ore prices, globally?

Earlier this year, iron ore prices fell to historic lows. Overall, ore prices have plummeted around 70% since hitting a peak in 2013, hurting big exporters such as Australia. A majority of analysts are of the view that the iron ore mining sector is unlikely to recover anytime soon, especially since the Chinese economy shows no major signs of recovery.

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There’s been a brief rally in iron ore prices sending hopes soaring in some quarters. In the last days of August, Standard & Poor’s revised upward its price “assumption” for the year to $50 from the earlier forecast of US $45 per mt, but added that the imbalance in supply and demand would remain for another two years. Others expect prices to slide later this year and the next, and probably it would stabilize at $50 a year.

The US’ trade gap shrank in July and a big three iron ore miner still has high production ambitions despite low iron ore prices.

Trade Deficit Shrinking

The US trade deficit fell in July to its lowest level in 5 months as exports rose, signaling underlying strength in the domestic economy amid concerns about a global growth slowdown.

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The Commerce Department said the trade gap narrowed 7.4% to $41.9 billion, the smallest since February. When adjusted for inflation, the deficit fell to $56.2 billion from $59.0 billion in the prior month.

The smaller deficit implied a modest contribution to gross domestic product from trade early in the third quarter. Trade added 0.3 percentage point to the economy’s 3.7% annualized growth rate in the second quarter

Data ranging from consumer spending to employment and housing have suggested the economy retained much of its momentum from the second quarter and was on solid footing when global financial markets were rocked by turbulence triggered by worries over China’s economy.

Rio Still Bullish On Iron Ore Production

Rio Tinto Group said on Thursday it will continue to boost iron ore production but had yet to give construction approval for a new mine, Silvergrass, in Australia amid board promises to rein in spending. The mine is essential if Rio is to deliver its long-term  $360 million metric ton global production target. Rio is on track to produce $340 million tons of ore this year.

The global miner said demand for iron ore would continue to grow despite current soft conditions and that half would be delivered via the seaborne market for at least the next 15 years, justifying an increase in tonnage.

Existing home sales are up and a major iron ore producer reported plunging profits and cut its steel outlook.

US Existing Home Sales Surge

US Home resales rose to a near 8-1/2-year high in July, Reuters reported.

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While other data on Thursday showed a slight increase in the number of Americans filing new applications for unemployment benefits last week, the trend remained consistent with strong labor market momentum.

The National Association of Realtors said existing home sales increased 2% to an annual rate of 5.59 million units last month, the highest pace since February 2007.

Demand for housing is being boosted by a strengthening labor market. But supply remains tight, pushing up home prices and sidelining first-time buyers, who are a key part of a strong housing market. The share of first-time buyers fell to a six-month low of 28% last month.

BHP Billiton Reports Profit Plunge, Cuts Outlook

BHP Billiton Ltd. reported full-year profit plunged 52% on tumbling commodity prices and cut its long-term forecasts for steel output in China, its largest customer.

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Underlying profit was $6.4 billion in the year ended June 30 from $13.3 billion a year earlier, the world’s biggest mining company said Tuesday in a statement. BHP will increase its dividend by 2.5 percent to $1.24 a share.