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2013 will be a dynamic year for iron ore

London, 24 January 2013

2013 is shaping up to be an interesting a year for iron ore.  As prices hit US$150/t in January – an 80% increase over the lows in September of last year – optimism briefly returned to the market. In the Pilbara, BHP Billiton’s Jimblebar expansion remains on track for first production in the March 2013 quarter and the company expects to reach a production rate of 183Mt in FY2013, up 5% from 2012.  Rio Tinto is targeting production of 290Mt by early 2014, compared to 253Mt in 2012.  FMG has restarted the development of its Kings deposit and remains committed to reach 155Mtpy production this year.

Meanwhile in Brazil, Vale is continuing the development of its S-11D expansion, expected to add 90Mt or approximately 30% of its current capacity by 2016.  And although Anglo American’s Minas Rio project is now commonly referred to as the world’s most expensive iron ore, production is nonetheless set to commence in 2015, to add an initial capacity of 26.5Mtpy to the market.

Yet in contrast to the scale of these expansions by the leading players, juniors are struggling to get back on their feet.  Following the 2012 slump in prices, projects that depend on speculative investment are failing to compete with those able to rely on a stable cash-flow.  The situation appears unlikely to improve, as Roskill forecasts that prices may fall to US$100/t by 2015 and US$90/t by 2016.  On the back of lower demand growth forecasts and decreased concern over access to supplies, announcements of new joint ventures with steel companies have also diminished.

As the prospects of projects are often linked, even promising assets are dragged down by the misfortunes of marginal players.  For example, in the Pilbara the projects by Atlas Iron, Brocknam Resources, Hancock Prospecting and other entrants depend on the construction of a fourth Pilbara rail line, but with lower prices and competing expansions from established companies, such a rail line may not secure the usage to render it economic.

In Africa, Rio Tinto and Vale have shifted their investment priorities away from their respective Simandou projects in Guinea.  As the vision of this area turning into the next Pilbara depends on sizeable investments in infrastructure, decreased enthusiasm among these iron ore majors spells bad news for the junior companies that have seeking to invest in the region’s future.

Thus, while the top players are expanding their capacity, the fortunes of iron ore juniors have reversed.  In February 2011, when prices reached US$200/t, the industry appeared set for increasing diversification.  Now, FMG, BHP Billiton and Rio Tinto appear on track to account for over 75% of capacity expansions in the Pilbara over the next five years.

The story is much the same in Brazil and beyond, and further consolidation is the likely path of the future.  A great shakeout among the junior mining companies appears probable.

Ends --


For a more detailed overview of current projects, forecasts for demand, supply and prices and an analysis of the trends and dynamics driving the industry see:

www.roskill.com

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