Roy Hill project
Australia’s billionaire Gina Rinehart’s $10 billion Roy Hill iron ore project expects to start shipping iron ore to world markets starting in October 2015. It is a 55 million ton per year project with an integrated mine, rail, and port operation.
Roy Hills’ CEO, Barry Fitzgerald, said in September 2015 that the project should achieve full capacity over the next 15 months. Roy Hill was the last of the major iron ore mining projects approved during the era of increasing seaborne iron ore prices. According to the company, it is a margin-focused business engaged in the low-cost production of high-quality iron ore. While it closely guards its cost of production, analysts estimate the cost of iron ore shipped to be close to $40 per ton.
It is based on this project’s economics that Citigroup (C) has called for iron ore to drop below $40 per ton next year. Citigroup described the new mine as an “impending whale” that would ship almost all of its output to China.
Minas Rio is Anglo American’s $8.4 billion iron ore project, located in Brazil. It shipped its first iron ore in October 2014. Anglo American’s CEO, Mark Cutifani, expects the total capacity of the project to reach 26.5 million tons per year.
The company took a $4 billion write-down on the project in 2013 and by $3.9 billion in February 2015. The per-ton cost is in the range of $30–$35 per ton. According to the company, further expanding the project to full capacity should help lower the costs further.
Kumba Iron (KIROY) is another major iron ore producer based out of Africa with annual shipments of close to 43 million tons. It is majority owned by Anglo American.
Net supply growth
Based on the supply additions from major miners and new projects, the total supply for iron ore is estimated to increase by 105 million tons in 2015. The supply exits are expected to be lower than this. Another 200 million tons of supply is expected to hit the market from 2016–2018. The chart above depicts these capacity increases from the world’s six largest iron ore miners, including Vale SA (VALE), BHP Billiton (BHP) (BBL), and Rio Tinto (RIO). BHP forms 5.4% of the SPDR S&P Global Natural Resources ETF’s (GNR) holdings.
A supply increase against a backdrop of weakening demand growth from the world’s biggest seaborne iron ore consumer doesn’t bode well for long-term iron ore prices. Other non-traditional exporters of iron ore such as Iran, Mongolia, and Mexico have considerably reduced their export. However, this isn’t enough to offset the supply expansions.
In the next part of this series, we’ll look at the factors that impact the cost profile for iron ore miners.