(Bloomberg) -- To understand why iron ore prices have dropped to a 10-year low, look no further than a $10 billion mine being developed by China’s state-owned Citic Ltd. on Australia’s remote northwest coast.
Despite an economic slowdown in China that has curbed demand for the ore, the country remains an enormous market and Rio Tinto forecasts steel production will expand through to 2030. To help satisfy those future needs, Chinese companies are looking abroad to diversify the nation’s iron ore supplies for years to come.
“Sino Iron is a 30 year plus project,” Citic said in an e-mailed statement. “Citic is committed to its completion and operation in the long-term.” The company declined to comment on the project’s costs.
Australia, Peru
Baosteel Group Corp. is evaluating options to develop a A$7.4 billion ($5.6 billion) project in Australia while Nanjinzhao Group Co. is progressing with a mine in Peru.
“A target of the Chinese government is to ensure that at least 50 percent of their future iron ore supply comes from a Chinese mine, though not necessarily a mine in China,” Araujo said. “That’s why China is in Peru, China is in Africa, China is in Australia.”
Chinese domestic iron ore production rose in 2014 and is expected to remain strong this year, according to Australia & New Zealand Banking Group Ltd. Major cuts to Chinese output are unlikely in 2015, Rio Tinto, the second-biggest exporter of the commodity, said on Feb. 12.
“Pundits have regularly commented that a supply response would quickly follow a collapse in iron ore prices as high-cost Chinese iron ore miners, who represent one third of global iron ore supply, would be forced to reign in their loss-making operations,” Morgans Financial Ltd. said in a March 24 note to clients.
“However,” the note added, “this has not unfolded.”
Chinese steel mill operators that also own iron ore mines have maintained output, while others operations are being aided by support from government and banks, according to the note.
Citic Writedown
Citic, China’s largest conglomerate, last week booked a $2.5 billion writedown on Sino Iron in full-year results for 2014. It’s continuing work to add four production lines, with two already constructed. Spending on the project reached $9.9 billion by the end of 2013, the company said in a filing last year. In a 2007 filing, a Citic unit estimated it would cost $1.4 billion for the mine to produce an initial 1 billion tons.
Sino Iron has a capital expenditure intensity of $333 a metric ton, the cost of development divided by projected output at full capacity, according to Bloomberg Intelligence. The global average last year was $153 a ton and the data show Citic’s mine is the costliest iron ore project in the world.
The project has “been a disaster,” Michael Komesaroff, managing director of Brisbane-based metals industry consultant Urandaline Investments Pty, said in 2013.
Capital Cost
“It is certainly the highest capital-cost mine because it’s a magnetite mine,” said Michael Elliott, sector leader for Ernst & Young LLP’s global mining practice, by phone from Sydney. Magnetite ore requires more processing and expensive infrastructure must be built before production begins. “It’s more exposed to a fall in the iron ore price.”
Still, some analysts say they believe Sino Iron may eventually prove to be a wise investment once it’s supplying Chinese steel mills with concentrate tailored to their needs at lower prices than domestic mines.
“When you think that China is a deep pocket investor which is targeting long term supply, it starts to make sense,” AME Group’s Araujo said.
To contact the reporter on this story: David Stringer in Melbourne at dstringer3@bloomberg.net
To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net; Andrew Hobbs at ahobbs4@bloomberg.net Keith Gosman, Will Wade
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