China's growing demand for alternative sources of iron ore will encourage new entrants into the sector even if prices are driven down further by a flood of new supplies, the head of producer London Mining Plc told Reuters.
The three dominant global suppliers - Vale , Rio Tinto and BHP Billiton - are currently expanding capacity rapidly, which some fear could force prices down and drive some smaller rivals out of business.
Analysts have said that low production costs and strong economies of scale enable the giants to pursue a strategy based on boosting market share, rather than maximizing prices.
But Graeme Hossie, chief executive of London Mining, said on the sidelines of an industry conference that China's quest for alternative sources would ensure that smaller players remain in the market.
“They (the big three) can flood the market, they can drive high-cost producers out of the business and maybe undermine the financing for some of the marginal players,” he said.
“But it is well understood in the industry that there is a need for new entrants, and certainly China wants new entrants - they want alternatives to the large guys.”
China, the world's biggest consumer of iron ore, has routinely accused the three giant mining firms, which between them account for more than 70 percent of global seaborne iron ore trade, of using monopoly practices to drive up prices.
Chinese steel firms also have warned them that their decision in 2009 to ditch annual price negotiations in favour of a quarterly index-based system could return to haunt them, saying increasing supplies could turn the market firmly in favour of buyers within two to three years.
Beijing is encouraging local steel mills to secure stakes in overseas iron ore projects and plans to source at least 45 percent of its imported ore by 2015 from mines in which Chinese firms are invested.
China's diversification strategy has already helped Australia's Fortescue Metals , 16 percent owned by China's Hunan Valin Iron and Steel, become a 55 million tonne per annum producer in less than a decade.
LONG-TERM PRICES SEEN FIRM
Iron ore prices collapsed by around $60 per tonne in October following a precipitous drop in orders from China. Analysts said prices were likely to rebound but were not expected to return to the previous highs of $180-190 per tonne and that the highest-cost producers might be forced to close.
The current slump is “a short-term anomaly”, Hossie said.
“When I am looking at potential acquisitions, it certainly does change the economics completely. So if you are funding a project and price expectations are much lower, it will affect the viability and the fundability of the project,” he said.
“But expectations for medium- and long-term pricing haven't changed - it is just that there is a low right now for reasons that aren't likely to be sustained for more than a few months.”
Production costs in the sector have been steadily rising as established deposits are depleted and miners turn their attention to costlier projects in remote regions where infrastructure still needs to be built.
“It is going to be more expensive to invest in and make iron ore in the future, and (the price) is going to have to support the increased costs of investment,” Hossie said.
Hossie said new miners were forced to find their niche away from traditional ore-producing regions or by developing projects the majors had deemed too small.
London Mining owns the Marampa project in Sierra Leone and Greenland's Isua and holds a 25 percent stake in a Saudi Arabian deposit. It sold another mine in Brazil to steel giant ArcelorMittal after struggling to gain access to the road and port infrastructure controlled by Vale.
Its total reserves amount to 2.2 billion tonnes, and output from Sierra Leone and Greenland is eventually expected to reach 30 million tonnes a year. It is eyeing other projects in the range of 5 million to 20 million tonnes per annum.
China's Sinosteel Equipment and Engineering and the China Communications Construction Corp have already been hired to help build infrastructure for the Greenland project, and London Mining also aims to sign off-take agreements with Chinese steel mills.
Hossie said China would be an ideal investor for the Isua mine, which is expected to go into full production by 2015.
“If we can get a partner for part or all (of the project) before March next year, we can begin construction and be producing in mid-2015. That's our objective.”
“We think it should be a Chinese partner, and that's the most likely,” he said. - Reuters