High-grade iron ore supply to struggle to meet demand as China decarbonizes: MI

Strong iron ore prices have shown great resilience, with the sustainability of their rally attracting market attention.

The S&P Global Platts 62% Fe index, IODEX, reached a record $233.1/dmt on May 12 driven by a resurgence in global demand, tightening supply and runaway steel prices. Although the IODEX eased back slightly in early June, iron ore and steel will be key beneficiaries of the infrastructure investment drive in China and the US, as well as from the global renewable energy transition over the medium to long term, through the rollout of new infrastructure for power generation, electric vehicle charging and high-speed electric rail networks. With a global steel production recovery underway, S&P Global Market Intelligence expects the iron ore seaborne trade deficit to deepen in 2021 and remain in deficit to 2025.

China to demand more high-grade ores

The Chinese steel industry aims to reach peak carbon emissions by 2025 and achieve a 30% reduction from the peak by 2030. These targets are set in accordance with the country's overall plan to see carbon emissions peak by 2030 and achieve carbon neutrality by 2060.

The decarbonization push is expected to boost demand for direct feed iron ore products — pellet and lump. Unlike iron ore fines, which need to be sintered with coke breeze and anthracite coal first, direct feed ores are directly charged to blast furnaces, emitting less pollution including carbon. Therefore, the Tangshan government has embarked on a scheme to reduce emissions at 23 local mills by 30%-50% by the end of 2021, with sintering operations bearing the brunt. Other Chinese regions may adopt similar measures to reduce carbon emissions in future.

Demand for high-grade ore is also expected to benefit from decarbonization due to its lower impurities and the higher productivity that it offers. Impurities such as alumina and silica in ore need to be removed using coke and limestone in iron making. Iron ore with lower impurities consumes less coke and limestone and therefore emits less carbon. Furthermore, the decarbonization push could constrain steel supply. The Ministry of Industry and Information Technology has called on Chinese mills to reduce crude steel output in 2021, citing this as the most effective way to constrain carbon emissions. Amid strong steel demand, pockets of steel production curbs helped to propel Chinese steel margins to historical highs in May 2021, boosting demand for high-grade ore, including pellet, concentrate, lump and high-grade fines.

China's need to diversify supply

Australia is the single biggest source of iron ore supply to China, accounting for 61% of Chinese imports in 2020. The escalating political tensions between the two countries, however, have driven China to look for alternative supply sources.

Indian iron ore exports over recent years have helped to fill shortages in the seaborne market. Surging coronavirus cases in India, however, are fueling fears of a supply crunch in 2021, while rising domestic demand is expected to reduce exports in coming years. A moratorium on mining in Goa is limiting the upside for Indian exports.

Brazil supply recovery still constrained

Global iron ore supply will struggle to keep pace with demand. Major producers with operations in the low-cost mining hubs of Australia and Brazil are expected to dominate export growth, with a shift towards increasing supply of high-grade ore to help meet tightening carbon emissions standards in the global steel sector. With few greenfield projects in the pipeline and ESG hurdles steepening, S&P Global Market Intelligence expects most of the seaborne supply growth to derive from restarts of shuttered capacity in Brazil, following the Brumadinho dam disaster in early 2019, and brownfield expansions.

Vale's first quarter iron ore production annualized to 327 million mt but the company is targeting 400 million mt/y at the end of 2022. The company continues to make steady progress on its operational stabilization and resumption plan. This has led to gradual restarts at Fábrica, Timbopeba and Serra Leste mines and at the Vargem Grande pellet plant. Three additional beneficiation lines at Timbopeba will boost capacity from 7 million mt/y to 12 million mt/y in the second quarter of 2021. Northern System mine supply is expected to rise by 24 million mt by 2023, with S11D increasing from 83 million mt in 2020 to 100 million mt from the second half of 2022, while the commissioning of the Gelado project will convert iron tailings into high grade products. Itabira and Mutuca mines, however, are operating under temporary tailings disposal restrictions, despite Vale targeting 50 million mt of supply growth from mines in the Southern and Southeastern Systems by 2023.

With Vale seeking to remediate numerous shuttered tailings dams, the supply recovery is constrained by difficulties in obtaining necessary safety approvals to reopen, amid Brazilian legislators' heightened safety consciousness following two major disasters. Finding a lasting waste disposal solution is key to the ramp up of Samarco's pellet facility, which restarted in December 2020 having been offline since the Fundão tailings dam collapse in November 2015. Samarco is targeting production at 7-8 million mt in 2021, before ramping up to 22-24 million mt in 2029. CSN plans to increase capacity at its Casa de Pedra mine from 30 million mt in 2020 to 108 million mt/y by 2033. The company is at fund-raising stage, helped by a recent IPO of its mining unit, and consequently will see most of the supply growth arriving post 2025. Brazilian ores typically have high iron content and low levels of silica and alumina. Brazil is also the world's biggest producer of pellet and direct reduction-grade iron ore.

Australia replacement projects boost high-grade supply

Australian iron ore shipments are expected to increase to 977 million mt in 2025, with the average iron content expected to rise thanks to more supply from high-grade mines and a reduction in lower grade product. BHP has recently started production at its South Flank sustaining mine project, located at the company's Western Australian Iron Ore hub, with a capacity of 80 million mt/y. South Flank will replace its Yandi mine, which is nearing the end of its mine life, and will lift average Fe grade from 61% to 62%, along with raising the share of lump output from 25% to 30%-33%.

Rio Tinto's $2.6 billion Gudai-Darri mine replacement project in the Pilbara is expected online in early 2022. The first phase has a 43 million mt/y capacity and will lift the lump to fines ratio for its Pilbara Blend shipments to 38%. The company has also approved a pre-feasibility study for a second phase expansion to 70 million mt/y and will see increased supply from its operations at Robe Valley, West Angelas and Tom Price following recent growth-targeted investments. While the Pilbara boasts huge potential for future supply growth, producers require the necessary 'social license' to develop new sites, as highlighted by the fallout from Rio Tinto's destruction of the Juukan Gorge caves, an aboriginal heritage site, to facilitate an iron ore expansion project.

FMG aims to produce higher grade iron ore products lifting its average Fe content from 58% to 60-62%. The company is developing the Western Hub in the Pilbara, this includes its recent high-grade replacement mine start, Eliwana, with a capacity of 30 million mt/y. The company's 22 million mt/y Iron Bridge magnetite concentrate project is under development and will deliver 67% Fe content product, with low alumina and phosphorus. Significant expansion potential could be in the pipeline at the Chinese backed CITIC Sino Iron high-grade magnetite operation at Cape Preston, in Western Australia. A long running dispute over land access to store mine residue will need to be resolved, however, while being a high cost operation remains an ongoing problem for Sino Iron.

More Chinese supply coming?

Iron ore supply concerns have prompted calls from China's National Development and Reform Commission for more exploration in China and for a diversification of the country's imports, with shipments from Russia, Kazakhstan, Mongolia and South East Asia likely increasing over the medium term — a similar trend was seen in 2009-2013.

Stronger Chinese domestic iron ore production is also expected, as high prices keep more high cost supply in play, with 217 million mt of 62% Fe content equivalent forecast in 2021.

Simandou — China's savior

Amid heightened political tensions between China and Australia, West Africa will provide the best opportunities for China to diversify its supply over the long term. The Simandou deposit in Guinea can potentially yield 200 million mt/y of high-grade iron ore. SMB-Winning - a Chinese-Singaporean-Guinean consortium – is aiming to commission production from Blocks 1-2 in 2025, although S&P Global Market Intelligence anticipates a 2027 earliest likely start. Blocks 3-4 are under a consortium of Rio Tinto, China Aluminum Corp. and the Guinean government. However, major capital expenditure will be required to build mine, rail and port infrastructure given Simandou's greenfield status.

In Liberia, meanwhile, ArcelorMittal is mooting a second phase expansion project at its Yekepa mine which is aimed at boosting exports from 5 million mt/y to 15 million mt/y from 2023 onwards. The expansion will be focused on exports of high-grade concentrate.

KEY IRON ORE PROJECTS/EXPANSIONS

Data as of May 31, 2021.

Source: S&P Global Market Intelligence

In summary, restarts, brownfield expansions and replacement mines are expected to support global iron ore supply growth. However, S&P Global Market Intelligence expects the market to remain in deficit in the medium term with supply growth hampered by steepening ESG hurdles and lack of greenfield projects, while demand is expected to rise as global steel production recovers from the 2020 low. The decarbonization drive in the steel industry is expected to reinforce the premiums of direct feed and high-grade iron ore, favoring miners with such options in their supply pipelines.