Western Australian Iron Ore - Laurent et al - Jul 2017 - UWA Business School

Laurent Barrere1, Allan Trench234, John Sykes235 & Sam Davies36 1. Gryzlly Resources, Perth, Australia: [email protected]

2. Business School, The University of Western Australia (UWA): [email protected]

3. Centre for Exploration Targeting, School of Earth Sciences, UWA

4. FAusIMM, CRU Group, London, United Kingdom (UK)

5. MAusIMM, Greenfields Research, North Yorkshire, UK: [email protected]

6. Alto Metals, Perth, Australia: [email protected]

AusIMM Iron Ore Conference: Perth, Australia: 24-26th July 2017

• This is a collaborative and interpretative piece of research;

• As such, you might not agree with some of what is presented (though hopefully it is

‘factually correct’);

• However, if we don’t try to learn from the past, how are we to do things better in the future?

• So please, DO NOT shoot the messenger/presenter! [Laurent]

• Instructions on “who to shoot for what”:

– History of WA iron ore: Allan and John

– Interpretations of key market events: Allan and John

– Story of FMG: Laurent, Allan and John

– IPO data: Sam, Allan and John

• If shooting is required, Allan and John’s email addresses are:

– [email protected]

– [email protected]

mailto:[email protected]


The world is seeing change at an

unprecedented pace –

The Mining Industry is not isolated!

IoT, sensors, AI, machine learning,

robotics, Solar, batteries, 3D printing, VR,

Cloud, Bid Data, UAV, nanosatellites,

blockchains, etc…

Understanding the past can help plan

the future – and not being thrown out

of the rollercoaster!

Challenges ahead as great but

different in nature.

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Global iron ore production 1957-2016 (millions tonnes)

Australia Rest of World

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Global iron ore production 1957-2016 (%)

Australia Rest of World

Discovery of

Whaleback

(1957) Export

embargo

lifted (1960)

Goldsworthy

mine, Pilbara

opens (1965)

Whaleback

opens (1968)

Tom Price

opens (1966)

Yandi (BHP)

opens (1992)

Yandi (Rio)

opens (1998)

Area C opens

(2003)

Mining starts

outside Pilbara*

(2004)

Nullagine (FMG)

starts (2008)

Data: USGS *WMC shipped iron ore from Koolanooka (Midwest) in 1966 (Ralph, 2005)

0

20

40

60

80

100

120

140

160

180

200

Dec-0

1

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2

Oct-

02

Mar-

03

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3

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4

Jun-0

4

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4

Apr-

05

Sep-0

5

Fe

b-0

6

Ju

l-0

6

Dec-0

6

May-0

7

Oct-

07

Mar-

08

Aug-0

8

Jan-0

9

Jun-0

9

Nov-0

9

Apr-

10

Sep-1

0

Fe

b-1

1

Jul-11

De

c-1

1

May-1

2

Oct-

12

Mar-

13

Aug-1

3

Jan-1

4

Jun-1

4

Nov-1

4

Apr-

15

Sep-1

5

Fe

b-1

6

Jul-16

Dec-1

6

China import Iron Ore Fines 62% Fe spot (CFR Tianjin port), US$ / Dry Metric Ton

Data: Indexmundi

Data: Indexmundi

0

10

20

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40

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60

70

80

0

2

4

6

8

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14

16

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Val

ue

of

IPO

s (A

$ m

illio

ns)

No

. IP

Os

No. WA ASX Iron Ore IPOs No. Other Australian ASX Iron Ore IPOs No. Foreign ASX Iron Ore IPOs

Value (A$M) WA ASX Iron Ore IPOs Value (A$M) Other Australian ASX Iron Ore IPOs Value (A$M) Foreign ASX Iron Ore IPOs

2002-06 – Getting into position • Majors re-start expansions: Rio Tinto and BHP around Newman and Tom Price

• New ‘minor’ producers: MidWest region, Mount Gibson (Tallering Peak), Cliff Natural

Resources, Sinosteel, Murchison Metals

• Interest in magnetite rising: Gindalbie Metals JV at Karara, CITIC Pacific for Sino Iron

• IPO market heating up: 3 WA IPOs in 2005 (Accent Res., Fe Limited, Iron Ore

Holdings), and 5 WA IPOs in 2005 (incl. BC Iron, Ferrowest, Mineral Res., Red Hill Iron)

Sources: Barrere et al., (2017); Wikipedia

2007-08 – Straining to produce more • Majors continue expanding & new ‘major’ producers: Rio Tinto 160 Mt, BHP 124 Mt, Hancock starts Hope Downs, FMG starts Cloudbreak

• ‘Minor’ developer-producers working hard… Mt Gibson starts Koolan Island, Murchison Metals starts Jack Hills, Atlas Iron, Sinosteel

• …but development problems beginning to arise: Bottleneck at Tallering Peak, Karara delayed, CITIC Psc. sees Capex up to US$4.2b (2.5b)

• IPO market goes crazy: 7 WA IPOs in 2007, 3 in 2008, at US$62/t.

Year Price WA Prod. No. IPOs

2003 US$ 14 213.0 Mt No data

2004 US$ 16 234.0 Mt No data

2005 US$ 28 262.0 Mt 3

2006 US$ 33 275.0 Mt 5

2007 US$ 37 299.0 Mt 7

2008 US$ 62 342.0 Mt 3


2009-10 – Crisis, what crisis? • Temporary GFC-led price crisis and then boom: export restrictions in India

• Majors gradual expansion unabated: Rio Tinto at 192Mt, BHP 132Mt, FMG 40Mt

• ‘Minors’ also continue unabated… Atlas starts projects, by Aurox for Port, JV FMG/BC Iron

• …but continued problems with magnetite: CITIC Capex at US$5.2b, targets start in 2011

• IPO market temporarily closed, then a ‘dead cat’ bounce?

2011-12 – Too good to be true!?! • Iron ore prices reach all-time highs but then start to wobble

• Cup of coffee reaches $5.50 in Perth!

• Majors become cautious: BHP curtails port expansion, FMG delays Solomon and sell assets

• ‘Minors’ struggling to maintain momentum: MidWest projects on hold when OPR abandoned,Jack Hills closed

• Hematite DSO easier than magnetite: Atlas sells magnetite assets, Mineral Res. starts Carina Haematite while CITIC Capex reaches $7.1b

• IPO market closes: One WA Iron ore IPO in 2011 (Brockman Mining) but IPO drought since


2005 US$ 28 262.0 Mt 3

2006 US$ 33 275.0 Mt 5

2007 US$ 37 299.0 Mt 7

2008 US$ 62 342.0 Mt 3

2009 US$ 80 394.0 Mt 0

2010 US$ 147 433.0 Mt 3

2011 US$ 168 488.0 Mt 1

2012 US$ 129 555.5 Mt 0


2013-14 – Reality begins to bite • Chinese demand accelerates but prices stall… and fall to US$74 by end 2014

• …as WA supply increases substantially from the majors: +130Mt in 2013

• …but with caution: Rio Tinto lowers Capex and and risk by focusing on brownfield

• …though less caution amongst the minors: Gindalbie in production, Atlas starts

Abydos and Mt Webber, M&A activity, although Sinosteel and Cliffs close their projects

2015-16 – The party is over • Prices bottom out and stabilise at lower levels: down to US$40/t end of 2015

• WA production growth slows but continues on regardless: from 15% av growth

• ‘Minors’ now struggling but some surviving nonetheless: Kimberley Mining,

Sinosteel Midwest, BC Iron closing, Atlas suspends. Mt Gibson, Mineral Res, CITIC in production


2005 US$ 28 262.0 Mt 3

2006 US$ 33 275.0 Mt 5

2007 US$ 37 299.0 Mt 7

2008 US$ 62 342.0 Mt 3

2009 US$ 80 394.0 Mt 0

2010 US$ 147 433.0 Mt 3

2011 US$ 168 488.0 Mt 1

2012 US$ 129 555.5 Mt 0

2013 US$ 135 682.7 Mt 0

2014 US$ 97 774.2 Mt 0

2015 US$ 55 817.0 Mt 0

2016 US$ 58 825.0 Mt 0

Winners • BHP and Rio Tinto made ‘super profits’ and both grew and consolidated their position

despite many new entrants;

• The WA state also earnt ‘super royalties’;

• FMG in reality is only the significant new entrant;

• Hancock Prospecting is also a more significant player (the fourth major?) though is part

new entrant, part incumbent.

Not winners • If not necessarily ‘losers’ many ambitious plans were not as successful as hoped;

• Magnetite projects generally disappointing;

• Most small scale WA (and other Australian and global) producers struggling, with

multiple mine closures and project suspensions, especially outside the Pilbara region;

• High cost Chinese domestic producers and ‘non-traditional’ country producers also

reducing production.

So how did this situation come about?



2005 US$ 28 262.0 Mt 3

2006 US$ 33 275.0 Mt 5

2007 US$ 37 299.0 Mt 7

2008 US$ 62 342.0 Mt 3

2009 US$ 80 394.0 Mt 0

2010 US$ 147 433.0 Mt 3

2011 US$ 168 488.0 Mt 1

2012 US$ 129 555.5 Mt 0

2013 US$ 135 682.7 Mt 0

2014 US$ 97 774.2 Mt 0

2015 US$ 55 817.0 Mt 0

2016 US$ 58 825.0 Mt 0

Pre-boom: ~2002 Demand accelerates: ~2006-11 High-cost supply response: ~2006-11

Low-cost supply response: ~2012-13 Demand stalls: ~2014-15 Back to normal: ~2016>

Prices set by

relatively low

cost supply

Stable

demand

curve

Fast moving

demand

curve

Theoretical ‘supply gap’ opens

up; NB: doesn’t happen in

reality – see next image

Prices set at new, higher level, encouraging

new supply on stream (next image)

Rapid response from high cost

Chinese & Indian miners Prices set at new,

higher level by new

high cost supply

Rapid response from medium-

high cost ‘junior’ sector (inc. FMG)

Low cost supply

response from the

majors FMG moves down

the cost curve

Continued

demand growth

protects high

cost miners

Demand stalls,

prices & supply

now under

pressure

Low cost supply

response continues

from the majors Medium & high cost

supply cutting costs

and closing down

Stable

demand

curve

Majors have grown

and consolidated low

cost production Medium & high cost

supply under

constant pressure

• Chinese imported iron ore demand was the key driver of demand growth and price boom;

• Caused both by a fundamental increase in iron ore consumption (~5% annually) and by an

increased reliance on imports (~12% annual growth) at the expense of high cost domestic

iron ore production (~9% annual decline);

Sources: CRU (2015); Barrere et al., (2017)

CHINA 2010 2014 Total change 2010-2014 Annual average change 2010-2014

Iron ore demand 953 Mt 1140 Mt 187 Mt 20% 47 Mt ~5%

Iron ore imports 620 Mt 927 Mt 307 Mt 50% 77 Mt ~12%

Domestic supply 333 Mt 213 Mt -120 Mt -36% -30 Mt ~ -9%

Exposure to spot price highs

(and lows);

Allows Australian-based ‘majors’

to capture the freight advantage;

Largely at Vale’s expense;

This is a long-term structural

advantage for BHP and Rio Tinto

(and FMG, Hancock etc.)

Near (FOB) Distant (FOB) Near (CFR) Distant (CFR)

CFR price

based on

operating

cost plus

freight

cost of

the most

distal

buyers

and

sellers

e.g. Brazil

& Asia

FOB price

based on

highest

operating

cost with

lower cost

miners

capturing

‘rents’

‘Consumer surplus’ captured by

nearest buyers as they have

lower freight costs

Freight cost advantage captured

by nearest producers as they

now pay for shipping

FOB

price FOB

price

Implied

FOB

price

Implied

FOB

price

Freight

cost Freight

cost

Freight

cost

Freight

cost

Source: Barrere et al., (2017)

• China-led market growth fall ‘barriers to entry’;

• No long-term contracts in place: competition for

‘new’ Chinese market was open;

• Fast-movers had an advantage;

• Majors focused on high-quality ore for existing

market, but China happy with lower quality;

• Over-spec can be as bad as under-spec…

Time

Pro

du

ct P

erfo

rman

ce

Source: Christensen (1997); FMG (2003); Trench and Sykes (2016); Barrere et al., (2017)

FMG perfect “vista” as soon as 2003

“Disruptive Innovation”

• The two major new entrants (FMG &

Hancock) played this game well;

• FMG saw the opportunity early

when there were lots of vacant

tenements in Pilbara;

• Hancock obviously already had

strong landholding and this has

always been a competitive

advantage of the group;

• The ‘nearly’ entrant of Atlas Iron

also played the land game very well

by picking up scraps and making

them work, using GSWA maps!

Source: Barrere et al., (2017); Images: FMG

• Infrastructure is one of the major barriers to entry in iron ore mining;

• FMG’s focus was on infrastructure, initially lobbying the government

to open up access to existing Pilbara infrastructure used (and built)

by the majors, but in the end having to build their own infrastructure;

• Infrastructure was a focus for many of the new iron ore entrants in

WA, for example:

– Several companies, including Atlas Iron and Mineral Resources used

trucking to work around their lack of rail access;

– Some M&A activity during this time was solely focused on port access,

e.g. Atlas-Warwick, Aurox-Atlas;

– BC Iron established a JV for rail and port access with FMG in the

Pilbara; Brockman and Flinders also later sought access;

– The key to any substantial Mid West growth in iron ore was the Oakajee

Port & Rail facility (ultimately abandoned).

Source: FMG (2003); Barrere et al., (2017)

From CEO’s address to FMG shareholders in 2003

• FMG had a coherent strategy, supporting by matching culture and leadership, that also

evolved as the situation did moving them from insurgent to incumbent:

– Saw opportunity early and secured it with ‘fast mover’ approach and entrepreneurial culture;

– Strategically targeted key barriers to entry:

Access to land;

Built new infrastructure;

Targeted a new customer segment;

– Brave use of debt and advocacy around debt-ratings;

– Technological innovation by using surface miners allowed low cost ‘off-the-shelf’

technological solution;

– Non-technological innovation in blending high and low grade ores to meet lower grade

Chinese specifications effectively expanding their scale and resources;

– Were able to control costs when required – partly cultural;

• All-in-all FMG grew first and grew quickly then consolidated hard when required.

• Even oligopolies are not invincible!

• In turn, successful insurgents need not be

‘best-in-class’, lowest cost, or even use

the latest new technology;

• Indeed the main theory of innovation

(‘disruptive innovation’) suggests it is

generally simpler, ‘lower quality’ solutions

that have most potential to grow rapidly

and dominate a market;

• Such opportunities occur when there is a

change in the ‘rules’ of an existing

market, usually around different customer

demand;

FMG makes good pizzas (metaphorically)… see Trench & Sykes (2016)

• Some minerals markets are more conducive to oligopoly and thus ‘super profits’ than others;

• Low barrier to entry commodities (i.e. gold) are easy to enter and can grow fast, but are hard to sustain an

advantage in – either as a company or a government:

– Such industries need to constantly re-invent their asset base with exploration and discovery i.e. a constant

‘insurgency’ attitude;

– For such commodities, Western Australia needs to promote exploration, new companies, new ideas, innovations etc.,

and resist ‘incumbency’ attitudes;

– Otherwise foreign companies / countries may outcompete WA, i.e. the decline of South African gold mining industry;

• High barrier to entry commodities (i.e. iron ore) are hard to enter but profitable and long-lasting once you are

behind the barriers:

– State governments may want to consider how they can be support oligopolistic incumbents during periods of low

growth and commodity prices;

– But, critically, must seek to open up and encourage competition during periods of fast growth and high commodity

prices in these industries, otherwise again, they risk being out-competed by new entrants.

• Companies (and governments) may also want to consider more how they can topple other oligopolies and get

inside them by learning from Western Australian iron ore experience:

– Require a holistic effort attacking each of the ‘barriers’;

– Timing is critical, i.e. when there is a rapid period of market growth;

• Which minerals markets are currently ripe for disruption and the toppling of existing insumbents and barriers

to entry? Lithium?

• Can companies apply the WA iron ore model in this case?

• Can the state help them in any way?

• However, all this only applies for commodities where WA sells more than it buys – for anything it buys more

than it sells it should breakdown barriers to entry and encourage competition and innovation;

• On average, we are consumers not miners in WA, and even miners are usually consumers before miners;

• Let’s not forget our social licence and duty of care to the economy and the public.

Contact details:

• Laurent Barrere: [email protected]

• Allan Trench: [email protected]

• John Sykes: [email protected]

• Sam Davies: [email protected]

With thanks to FMG for help and guidance.





• Barrere, L., Trench, A., Sykes, J.P., and Davies, R.S., 2017, New

generation Western Australian iron ore 2006–2016 – strategic insights

far beyond the Pilbara?, Iron Ore Conference, Perth, 24-26 July.

• Brandenburger, A.M., and Nalebuff, B.J., 1996, Co-Opetition: A Revolution

Mindset that Combines Competition and Cooperation, Crown Press.

• Christensen, C., 1997, The Innovator's Dilemma: When New Technologies

Cause Great Firms to Fail, Harvard Business Review Press.

• Economist, The, 2015, Development: The 169 commandments, 26 March.

• Fortescue Metals Group (FMG), 2003, Chief Executive Officer’s address to

the shareholders’ meeting, FMG, 18 July.

• Porter, M., 1980, Competitive Strategy: Techniques for Analyzing Industries

and Competitors, Free Press.

• Porter, M., 1985, Competitive Advantage: Creating and sustaining superior

performance, Free Press.

• Trench, A., and Sykes, J.P., 2016, FMG make good pizzas, 12 September.

Majors re-start expansions • Majors had begun expanding production again including Rio Tinto’s West Angelas (2002) and

BHP’s Area C (2003) around Newman; and Rio Tinto’s Eastern Range (2004) at Paraburdoo

and Nammuldi (2006) at Tom Price.

New ‘minor’ producers • First non-Pilbara and non-major iron ore mines opened in WA in 2004: Tallering Peak, Mid West

(Mount Gibson) and Windarling Range, Wheatbelt (Cliffs Natural Resources); other small

developer-producers include Sinosteel Midwest and Murchison Metals in the Mid West region.



2002 US$ 13 187.2 Mt No data

2003 US$ 14 213.0 Mt No data

2004 US$ 16 234.0 Mt No data

2005 US$ 28 262.0 Mt 3

2006 US$ 33 275.0 Mt 5

Interest in magnetite rising • Gindalbie Metals announces a JV with Anshan Steel at Karara (2006); CITIC Pacific JV with Mineralogy to develop Sino Iron magnetite project

(2006); Grange Resources developing Southdown magnetite project, South West.

IPO market heating up • Three WA iron ore IPOs in 2005 (Accent Resources, Fe Limited, and Iron Ore Holdings) and five WA iron ore IPOs in 2006 (Athena Resources,

BC Iron, Ferrowest, Mineral Resources, and Red Hill Iron).

Majors continue expanding & new ‘major’ producers • Rio Tinto’s production reaches 160.6 Mt and BHP’s reaches 124.4 Mt in 2008; Rio Tinto and

Hancock Prospecting start Hope Downs (2007) at Newman; whilst Fortescue Metals Group

(FMG) starts Cloud Break at Nullagine in 2008.

‘Minor’ developer-producers working hard… • Mount Gibson starts Koolan Island off the Kimberley and Murchison Metals starts Jack Hills

in 2007; whilst Atlas Iron starts its Port Hedland operations in 2008; Sinosteel Midwest JV

forms to develop Weld Range hematite and Koolnooka magnetite projects in the Mid West

(2007); Grange Resources signs JV with Sojitz at Southdown magnetite, South West (2007).


…but development problems beginning to arise • Mount Gibson has bottleneck issues at Tallering Peak; Gindalbie Metals delays Karara hematite start-up; Grange Resources pushes back

Southdown magnetite start-up to 2012; and CITIC Pacific announces capital cost increase to US$4.2 billion (from $2.5 B) at Sino Iron all in 2008

IPO market goes crazy • Seven WA iron ore IPOs in 2007 (Apollo Resources, Aurium Resources, Magnetic Resources, Pacific Bauxite, Reedy Lagoon, Warwick

Resources, and Zenith Minerals) and three in 2008 (China Steel Australasia, Emergent Resources, and Legacy Iron Ore).


2003 US$ 14 213.0 Mt No data

2004 US$ 16 234.0 Mt No data

2005 US$ 28 262.0 Mt 3

2006 US$ 33 275.0 Mt 5

2007 US$ 37 299.0 Mt 7

2008 US$ 62 342.0 Mt 3

Temporary GFC-led price crisis and then boom • The GFC temporarily stalls prices, but on average over the year they increase; and due to export

restriction legislations in India in 2010 spot prices spike.

Majors gradual expansion unabated • Despite market ‘jitters’ Rio Tinto expands production to 192.5 Mt, including the start of

Brockman 4 at Tom Price and Mesa A at Pannawonica; whilst BHP expands to 132.6 Mt and

FMG reaches 41.9 Mt with the start of Christmas Creek by the end of 2010;

‘Minors’ also continue unabated…


• Atlas announces multiple hematite and magnetite projects, takes over Warwick Resources and Aurox Resources partly for port capacity, and starts

up Wodgina; BC Iron signs infrastructure JV with FMG at Nullagine and production starts in 2010.

…but continued problems with magnetite • CITIC Pacific announces Sino Iron project capital cost estimate has increased to US$5.2 billion (from $2.5 billion), but hopes for production in 2011.

IPO market temporarily closed, then a ‘dead cat’ bounce? • No WA iron ore IPOs in 2009, but three in 2010 (Rutila Resources, Sheffield Resources and Talga Resources).


2005 US$ 28 262.0 Mt 3

2006 US$ 33 275.0 Mt 5

2007 US$ 37 299.0 Mt 7

2008 US$ 62 342.0 Mt 3

2009 US$ 80 394.0 Mt 0

2010 US$ 147 433.0 Mt 3

Iron ore prices reach all-time highs but then start to wobble • Iron ore price reaches US$187/t in Feb. 2011 but drops below US$100/t by the end of 2012;

Indian exports still restricted whilst high-cost miners in India and China close.

Majors become cautious • BHP curtails dramatic port expansion plans; FMG delays Solomon mine and sells off assets.

‘Minors’ struggling to maintain momentum • Mid West projects delayed when Mitsubishi abandons Oakajee Port and closes Jack Hills; but

Atlas Iron takes over Giralia Resources and Ferraus, buys Corunna Downs from Gondwana

Resources and takes $325M loan for developments.


Hematite DSO easier than magnetite • DSO hematite projects still performing better with Atlas selling off magnetite projects, Mineral Resources starts up Carina hematite; and CITIC

Pacific increases Sino Iron magnetite capital cost to US$7.1 billion but starts commissioning in 2012.

IPO market closes • Only one WA iron ore IPO in 2011 (Brockman Mining) but the market has been closed since.


2005 US$ 28 262.0 Mt 3

2006 US$ 33 275.0 Mt 5

2007 US$ 37 299.0 Mt 7

2008 US$ 62 342.0 Mt 3

2009 US$ 80 394.0 Mt 0

2010 US$ 147 433.0 Mt 3

2011 US$ 168 488.0 Mt 1

2012 US$ 129 555.5 Mt 0

Chinese demand accelerates but prices stall… • Chinese driven iron ore demand at 8% annual growth, but prices decline to US$74/t by the end

of 2014.

…as WA supply increases substantially from the majors • Rio Tinto/Hancock Prospecting open Hope Downs 4; Hancock also announces plans for

Roy Hill; and low cost WA production begins to squeeze high cost Chinese and non-traditional

country production.

…but with caution • Rio Tinto lowers capex and risk by focusing on brownfields.

…though less caution amongst the minors • Gindalbie Metals goes into production; Atlas Iron starts up Abydos (2013) and Mt Webber

(2014); BC Iron takes over Iron Ore Holdings; Brockman and Flinders negotiate with FMG

for infrastructure access; Atlas, Brockman, Flinders, Aquila, Mitsubishi and Asian Iron all

advancing projects, although Sinosteel Midwest closes Koolanooka and Cliffs closes

Koolyanoobbing in 2013 and weather affects Mount Gibson’s Koolan Island project in 2014. Sources: Barrere et al., (2017); Wikipedia


2005 US$ 28 262.0 Mt 3

2006 US$ 33 275.0 Mt 5

2007 US$ 37 299.0 Mt 7

2008 US$ 62 342.0 Mt 3

2009 US$ 80 394.0 Mt 0

2010 US$ 147 433.0 Mt 3

2011 US$ 168 488.0 Mt 1

2012 US$ 129 555.5 Mt 0

2013 US$ 135 682.7 Mt 0

2014 US$ 97 774.2 Mt 0

Prices bottom out and stabilise at lower levels • Prices drop to US$40/t at the end of 2015 recovering to nearer US$80/t by the end of 2016 –

prices within this range now seem to be the ‘new’ normal; iron ore consumption growth stalled

(and in 2015 reversed).

WA production growth slows but continues on regardless • Iron ore production grows slower than phenomenal 15% average annual growth rate of 2008-14;

Roy Hill (Hancock Prospecting) goes into production in 2015 but Samarco disaster makes

BHP more cautious on expansions globally, whilst Rio Tinto postpones Silvergrass expansion.

‘Minors’ now struggling but some surviving nonetheless • Lower prices impact minors with Kimberley Mining closing Ridges, Sinosteel Midwest closing

Blue Hills and BC Iron closing Nullagine all in 2014; Atlas Iron suspends all operations in

2015 but after debt renegotiation manages to restart Wodgina, Mt Webber and Abydos; Mount

Gibson resumes production from Koolan Island (Acacia East) in 2015; Mineral Resources

production from Iron Valley and Yilgarn grows strongly; CITIC Pacific’s Sino Iron magnetite

finally goes into production and ramps up through this period.



2005 US$ 28 262.0 Mt 3

2006 US$ 33 275.0 Mt 5

2007 US$ 37 299.0 Mt 7

2008 US$ 62 342.0 Mt 3

2009 US$ 80 394.0 Mt 0

2010 US$ 147 433.0 Mt 3

2011 US$ 168 488.0 Mt 1

2012 US$ 129 555.5 Mt 0

2013 US$ 135 682.7 Mt 0

2014 US$ 97 774.2 Mt 0

2015 US$ 55 817.0 Mt 0

2016 US$ 58 825.0 Mt 0

Pre-boom: Flat, stable cost curve, slow

demand growth, low but stable prices

(~2002)

Demand accelerates: Rapid demand growth

stretches the cost curve, increasing prices rapidly

and encouraging new supply on-stream (~2006-11)

High-cost supply response: as able to react quicker

including Chinese & Indian domestic, non-

traditional supply countries and ‘junior’ sector,

including FMG at this stage (~2006-11)

Low-cost supply response: larger scale, lower cost

supply comes on stream, however, continued

demand growth protects high cost producers

temporarily, FMG becomes low cost at the stage

whilst other new entrants do not (~2012-13)

Demand stalls: whilst large volumes of lower cost

supply still coming on stream, pushing high cost

producers ‘off the curve’ – some Chinese & Indian

miners are state protected transferring pain to

middle of the cost curve (~2014-15)

Back to normal: both supply and demand have

stabilised, state-supported Chinese & Indian miners

and juniors in slow decline, majors (now including

FMG & Hancock) consolidate position (~2016>)

Prices set by

relatively low

cost supply

Stable

demand

curve

Fast moving

demand

curve

Theoretical ‘supply gap’ opens

up; NB: doesn’t happen in

reality – see next image

Prices set at new, higher level, encouraging

new supply on stream (next image)

Rapid response from high cost

Chinese & Indian miners

Prices set at new,

higher level by new

high cost supply

Rapid response from medium-

high cost ‘junior’ sector (inc. FMG)

Low cost supply

response from the

majors FMG moves down

the cost curve

Continued

demand growth

protects high

cost miners

Demand stalls,

prices & supply

now under

pressure

Low cost supply

response continues

from the majors Medium & high cost

supply cutting costs

and closing down

Stable

demand

curve

Majors have grown

and consolidated low

cost production Medium & high cost

supply under

constant pressure

Benchmark System (Historical Price Mechanism) Spot price index (Current Price Mechanism)

Annual Daily

FOB CFR

Dry metric tonne unit (dmtu) - where the price

per tonne of a quantity of iron ore is calculated by

multiplying the cents/dmtu price by the percentage of

iron content.

Dry metric tonne - where the price per tonne of a

quantity of iron ore is cited as a US$/tonne value,

reflective of the contained Fe grade (e.g. 62% Fe)

Typically set in Japan, China, or Europe Chinese port price

Agreed in the context of a long-term contract and

established relationship

Journalistic assessment of spot transactions

Agreed between producer and consumer Multiple players – producers, consumers, traders,

speculators, banks etc.

Price negotiations typically considered

supply / demand,

relative financial performance of the

suppliers and consumers

need for further investment in iron ore

supply capacity including cost function

Transactional summation of reported daily activity

Price setting was partially forward looking – i.e.

considered outlook for next 12 months

‘Price of the day rules’

Annual price average not impacted by variation in

shipping schedule

Average annual price calculation determined in part

by shipping schedule/rates.

Benchmark traditionally covered vast majority of

seaborne iron ore trade

Difficult to determine extent of sales volumes

covered by daily index (far less than benchmark

process)

Benchmark did not include on-sales of

cargo/tonnages

Spot sales data can often include multiple sales of

same cargo – producer to trader, to Chinese trader,

ex stockpile to Chinese mill.

Economy & Finance

Western Australian Iron Ore - Laurent et al - Jul 2017 - UWA Business School