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There’s Still Money to Be Made in Australian Resources

September 25th, 2012 · Bee Lin Ang · 2 Comments

The apparent end of the biggest resource boom in a century in Australia, occasionally called China’s commodity quarry, has drawn downbeat forecasts from politicians and analysts, but there are some indications that signal all is not over for the lucky country.

According to Bloomberg, China bought the most iron ore in three months in August and stockpiles at its ports fell for the first time since March. Based on customs data, China’s iron ore imports in August rose 7.9 percent from July to 62.45 million tons. Meanwhile inventories held at ports dropped 1.2 percent to 98.5 million tons.

Analysts are also expecting rates to ship iron ore to triple in the fourth quarter from average prices at the end of June amid speculation that China’s steel mills will boost imports following the government’s announcement that it will spend about US$1 trillion on infrastructure projects to help stimulate the economy. According to Morgan Stanley, seaborne iron-ore exports will expand 14 percent next year, three times faster than in 2012.

Besides infrastructure projects, which may include ports, warehouses and subways, iron ore demand in China is also driven by the construction sector. Real estate investment accounted for 13.6 percent of China’s gross domestic product in the first half of 2012.

Reuters reported that China’s real estate investment rose 15.6 percent in the first eight months of 2012 from a year earlier and appears to be accelerating, based on government data. China’s capital city of Beijing plans to sell 20 plots of land in September, after selling 32 parcels in the first eight months, and land sales revenues in China’s top 10 cities, including Beijing and Shanghai, totalled 40.9 billion yuan ($6.5 billion) in August, up 14.4 percent from July.

Amid a more positive outlook, prices of iron ore that had fallen to nearly three-year lows on Sept. 5 have since rallied 26 percent. In line with the increase, Fortescue Metals Group’s share price and other iron miners have also risen. Chief Executive Nev Power was quoted as saying in the Brisbane Times that every $US10-a-tonne increase in the iron ore price would generate an extra $1.2 billion in free cash flow for the company. The Platts 62-percent iron ore index has risen to US$105 a tonne on September 17 – a 21 percent rebound from its September 6 low of US$86.70.

While the Australian Bureau of Resource and Energy Economics (ABREE) has marked down its forecast for growth in China’s steel consumption from the 4 percent tipped in June for both 2012 and 2013 to just 1 per cent this year, rising to 2 percent next. Chief Executive Quentin Grafton told The Australian newspaper that prices for the country’s key iron ore and coal exports will bounce back in the coming months as China’s steel mills return to the market. He added that the price fall reflected short-term cyclical factors rather than any change in the long-term outlook for Australian export commodities.

Meanwhile Rio Tinto is expanding iron ore operations, including a US$4.2 billion spending plan approved in June, even as prices drop. According to the company, its expansion of its Pilbara business in Western Australia to increase capacity to 283 million tons a year is on schedule to be completed by the end of 2013.

“We continue to forecast that annual Chinese steel production will grow from its current level of around 700 million tonnes to around one billion tonnes a year out towards 2030,” Rio Tinto Iron Ore Chief Executive Sam Walsh said in a statement in June. “This demand growth is coupled with an increasingly challenged supply response, as several high-profile competitor projects have recently been either delayed or postponed.”

Besides expansions for its iron ore operations, Rio Tinto has sought to increase its share of the global uranium market. The company bought Canada’s Hathor Exploration for $654 million last year with the aim of supplying China’s ambitious nuclear programme while its units in Australia and Namibia struggled to boost production.

The acquisition was timely because in February Canadian Prime Minister Stephen Harper negotiated a new agreement that will allow uranium mining companies to increase exports to China as part of a number of joint initiatives aimed at renewing existing bilateral trade in energy, resources, agriculture, technology and education.

According to Rio Tinto, it expects China’s demand for uranium, driven by the country’s plan to build more than 100 new reactors over the next ten years, to offset weaker demand from Japan and Germany. “Korea, India and the UAE are also building new nuclear power plants, and investment in new capacity continues in the more mature markets of the US and Europe. For many countries, energy diversification is the key to their energy security.”

China is constructing 26 reactors, the most of any country in the world, and also has 51 more planned, according to the World Nuclear Association’s website. India and Russia, which together have 53 reactors, are building 17 and have 33 planned.

Meanwhile Rio Tinto’s beleaguered subsidiary, Energy Resources Australia (ERA), is expected conclude renegotiation of the 1978 Ranger mine agreement with the Mirrar indigenous tribe before the end of this year. An agreement will contribute positively towards the development of the Ranger 3 Deeps exploration project, which is crucial to the future of ERA because its current mine will cease operations at the end of this year. ERA is 68-percent owned by Rio Tinto.

Bee Lin Ang is a writer and blogger based in Sydney. She was a former editor with Bloomberg News in Hong Kong and spent 10 years as a correspondent with Reuters in Singapore, London and Melbourne, specialising in Asian equities and commodity markets. She is fluent in Mandarin and speaks various other Asian languages.

2 responses so far ↓

  • 1 Greg Atkinson // Oct 2, 2012 at 11:01 am

    I think Sam Walsh from Rio Tinto might want to check the contents of the office water cooler because the issue with steel production in China at the moment is over capacity. Mind you when people make a forecast out to 2030 they can safely be elsewhere when the forecast turns out to be way off the mark 😉

  • 2 Biker // Apr 2, 2013 at 4:53 pm

    Green light for uranium in WA:

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