Iron ore: Australian mining’s silver lining

JP Casey 15 July 2020 (Last Updated July 13th, 2020 11:08)

Iron ore has remained mostly unaffected by the Covid-19 pandemic, with local disruption in places counterbalanced by improved productivity in others, with Australia leading the way in pandemic production. What has gone into making Australian iron ore such a safe asset?

Iron ore: Australian mining’s silver lining
“From a production standpoint, the impact of Covid-19 is expected to be only short-term,” said David Kurtz, as Australian iron ore remains a safe haven asset. Credit: Baras

Covid-19 has been a significant disruption for much of the mining industry, with everything from day-to-day operations to macroeconomic predictions thrown into turmoil by the pandemic and resulting quarantine measures put in place around the globe. However, iron ore has emerged as a relatively stable asset in these tumultuous times, with prices falling just 1.1% in the first three months of the year. The commodity even rebounded in May, with the spot price for 62% iron ore, the industry standard, reaching $100 per tonne on 26 May, up from $90 per tonne the previous month.

Much of this positive trend has been driven by opposing, but related trends among the world’s iron ore giants: stable production in Australia countered by declining production in Brazil. With China’s vast appetite for iron ore largely unaffected by the pandemic, Australia has emerged as its favourite trading partner. Fortescue alone shipped a record quantity of iron ore to China in March this year, sending 42.3 million tonnes in the first quarter of the year, a 10% increase compared to the previous quarter.

These opposing fortunes have created an unusual equilibrium in the global iron ore market, with increased production in some areas offset by declines in others, resulting in an industry rife with local disruption, but that remains relatively unchanged on a macro level. With more hopeful miners believing that Covid-19 will be little more than a temporary disruption to traditional working methods, there are reasons to be optimistic for the future of iron ore in Australia.

Stable Australian production

Underpinning this trend is the impressive consistency of Australian iron ore production, which grew by 1.2% in 2019 and is only expected to fall by 1.4% in 2020, suggesting that the Covid-19 pandemic will do little more than force the iron ore industry to regress to the mean following years of sustained growth.

Indeed, much of this growth has taken place in spite of external pressures and disruptions, such as the impacts of Cyclones Veronica and Damian on the country’s iron ore exporting ports. This ability to literally weather external storms could prove invaluable considering the potential long-term damage of Covid-19; GlobalData mining analyst David Kurtz noted that in response to Cyclone Veronica cutting production at Rio Tinto by 3.3% in 2019, junior miners rallied to pick up the slack, improving their own production figures by 8.9% that year.

“Over 2020-2024, the country’s iron ore output is expected to grow by a CAGR (combined annual growth rate) of 3.3% to reach 1,031.4 million tonnes (Mt) by 2024,” said Kurtz, noting that the resilience of the Australian iron ore sector, combined with the demand for new mining projects, could lead to long-term growth, in spite of the pandemic. “The growth will be supported by the number of upcoming iron ore projects, which are expected to add 271.3Mt of capacity over the forecast period.

“One major project is BHP’s South Flank project, which will replace the 80Mt it mines at Yandi annually, with others being the Central Eyre Iron Project in South Australia, and the Marillana Iron Ore Project and Ridley Magnetite Project in Western Australia.”

This continuity in production has led to a continuity in prices, helping to make iron ore a more attractive prospect for investors, and creating a virtuous cycle of stable production and financial support. Kurtz used percentage figures to measure the relative volatility of commodity prices between 2017 and 2019, concluding that the price of iron ore fluctuated just 15.6%, compared to 26.3% for coal, making iron ore a relatively stable asset.

This stability is also set against a backdrop of varied production, with iron ore production increasing 0.6% over this period, while copper production jumped 10.5%. The fact that iron ore prices were more consistent, despite experiencing less growth in raw production, is a testament to Australian iron ore as something of a safe haven asset.

“Given the lower price fluctuations seen in iron ore, it appears more stable than copper and, looking ahead, expectations are that, for 2020-2024, iron ore will have a price volatility of 7.3% compared with 7.9% and 10.6% for coal and copper respectively,” Kurtz continued.

Local disruption leads to global balance

The relative stability of Australian iron ore mirrors that of iron ore around the world, albeit in reverse; globally, a decline in production has coincided with a decline in demand, which has helped keep prices competitive. This has led to a surreal situation, where individual companies and countries are slashing production guidelines and iron ore demand is falling around the world, but these declines are more or less balanced with one another, leaving the global iron ore industry relatively unchanged.

“While China’s steel production is lower than in 2019, it is not down too far. Chinese March crude steel production fell by 1.7% to 79 million tonnes compared with the same period last year,” said Kurtz, highlighting small declines in production matched by small declines in demand. “Although demand for finished [steel] is weak, concerns for supply, such as that caused by Vale’s revised guidance (310-300Mt versus an original expectation of 340-355Mt), have helped keep prices over$80/t and they were$89.5/t on 15 May.”

Vale’s revisions are perhaps the greatest change in the iron ore industry, with production declines posing the greatest threat to the tense balance that has emerged in the sector. The miner is still reeling from the collapse of a tailings dam in January 2019, with the resulting safety audits and overhauls leading to the closure of its Brucutu mine in Brazil, wiping 30 million tonnes of production from its books. Even the company’s more optimistic assessments for its 2020 production are ominous, with the best-case scenario of 310Mt only a shade greater than its 2019 production total of 302Mt, which was the miner’s lowest end-of-year production total since 2010.

Meanwhile, Australian iron ore production is trending in the opposite direction, with expansion work planned across a number of operations. BHP’s plans to expand its iron ore export capacity at Port Hedland, in Western Australia, have not been deterred by the Covid-19 pandemic, with the miner targeting an annual increase in iron ore exports of 40Mt.

Looking ahead

Kurtz is optimistic that despite the obvious challenges presented by the pandemic, Australian iron ore will be relatively untroubled in the long-term, especially compared to other big iron ore miners, characterising the impacts as “moderate [and] negative”.

“We are expecting a decline in production of 1.4% in Australia, 12.5% in India, and 2% in China,” he said. “With declining steel demand, the average annual price is expected to decline from $93.84/t in 2019 to $79.60/t in 2020; however, if supplies from Brazil remain limited, this would support a higher average price.”

These relatively small disruptions to iron ore production, especially in countries such as Australia and China with expansive iron mining operations and long-term investments in the metal, are a testament to the resilience of iron ore mining and processing as a whole. Australia in particular boasts vast reserves, with the national government estimating resources of over 20 billion tonnes in 2018. The nation also has the infrastructure to extract this iron for years to come, with the government predicting that Australian iron ore mining could continue until 2042 at the current pace.

In short, iron ore mining is an industry deeply entrenched into the Australian industrial and economic system, and is unlikely to be wholly derailed by even the most disruptive of short-term external pressures, which is how Kurtz categorises the Covid-19 pandemic in this context.

“From a production standpoint, the impact of Covid-19 is expected to be only short-term,” he said. “Global iron ore production is expected to grow at a CAGR of 3.5% to reach 2,553.8Mt by 2024. Australia, Brazil, and India will be the key contributors to this growth. Combined production in these countries is expected to increase from 1,606.2Mt in 2021 to 1,800.9Mt in 2024, supported by the opening of major projects such as South Flank and Rio Tinto’s Koodaideri mine in Australia.”