The miners who made Australia the world's biggest iron ore producer are now helping revive Western Australia's local manufacturing of iron ore railcars needed to get their product to market.

Western Australia made nearly 60% of Australia's freight railcars in 2012, yet its share dropped to 5% four years later as China took over the market, according to Francis Logan, who chairs a state government action group that aims to reverse that trend.

Logan's action group, which includes iron ore producers, steel fabricators, industry associations and trade unions, was formed in October 2021 in response to a July 2021 report from Aboriginal consultancy Keogh Bay spelling out the economics of manufacturing iron ore railcars in Western Australia.

"Keogh Bay did a cost comparison with imported products, and it was illuminating to see that West Australian companies can actually compete with Chinese-made fully manufactured freight railcars, and also the components," Logan, a former minister in Western Australia's Labor government, told S&P Global Commodity Insights.

"If you're ordering hundreds of wagons, there is no doubt the Chinese would give you a significant discount on the price, making it very difficult for local companies to compete. But if it's for small-scale, quick-response manufacturing of wagons — like 50 or 60 that are needed — the study found that the price is very competitive for the full manufacture of those wagons in Western Australia."

The industry hopes to improve its competitiveness over time so that local manufacturers eventually supply a significant share of the 32,000 freight railcars hauling iron ore in the Pilbara region, where production by BHP Group Ltd. and Rio Tinto Group has been steadily rising in 2022, according to S&P Global Market Intelligence data.

Railcar export future

The report urged the government to invest in research and development for the rail industry and to look into designing a rail wagon specific to the Pilbara iron ore market that could also be exported to mining regions overseas.

Western Australia's iron ore producers usually "like to keep their intellectual property close to their chest," so it was telling that they were "very good at providing, on an individual basis, all the information for the cost replacement of various components of the wagons," Logan said. Details of the cost comparisons were not released publicly.

Logan said miners were eager to save on shipping costs as well as lighten their carbon footprint from delivering already-made units from China.

The state government and industry are now looking into local manufacturing of railcars to suit lithium, of which Australia is also the world's largest producer, and nickel, among other commodities, Logan said. BHP hosts the world's second-largest nickel sulfide resource in Western Australia alone.

An iron ore car made by UGL for BHP Group in Perth, Western Australia. Source: BHP Group

"This is the beginning of a long path back to significant manufacturing capacity which will make Western Australia a leader in this area," Logan said.

'Straight into production'

In the early stages of the revival, CIMIC Group Ltd. unit UGL built and delivered five iron ore cars to the Pilbara region for BHP as part of an industry-first initiative announced Oct. 19, whereby UGL will build 140 flat-pack iron ore railcars over the next four years in Perth, Western Australia. The railcars will be made with components shipped from CNR Qiqihar Railway Rolling Stock (Group) Co. Ltd.'s factory in China.

"Social value is something that's really important for us, and we think there's huge value in learning how to create a productive industry manufacturing ore cars here in Western Australia," BHP Western Australia Iron Ore Asset President Brandon Craig said when launching the initiative in Perth Oct. 19.

"Ultimately, we would like to be able to get them manufactured potentially all the way up into Port Hedland [where the iron ore is mined and exported] ... so we can go straight from manufacture, straight onto our lines, and straight into production," Craig said.

BHP's announcement came 10 months after iron ore peer Rio Tinto called for expressions of interest from Western Australia's manufacturers to build 100 railcars for its iron ore mining operations in the Pilbara region.

"As the local manufacturing industry grows, we will continue to look at ways to engage local businesses to be part of our supply chain," Simon Trott, Rio Tinto's chief executive for iron ore, said at the time.

Fortescue Metals Group Ltd., or Fortescue, which is also part of Logan's working group, is open to using local manufacturing as it develops the world's first regenerating battery electric iron ore train, called the "Infinity Train." It is working with subsidiary Fortescue Future Industries Pty. Ltd. and British group Williams Advanced Engineering Ltd., which Fortescue acquired in January.

"Feasibility studies are progressing, with details on where the Infinity Train will be manufactured to be determined once studies conclude," a Fortescue spokesperson told Commodity Insights in an email interview. "Weighting is given to local suppliers that provide benefits and employment to the communities within the regions Fortescue operates."

S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.