Storm In An Iron Tea Cup

Copper prices have hit multi-year heights. Copper has recovered from below USD 2.00 per pound at the bottom of the Coronavirus outbreak in China to around USD 3.17 on Monday this week (nearly USD 7,000 per metric tonne).

The lesser reason is Coronavirus-related disruption to South American copper mining. The greater reason is that China has unofficially banned imports of Australian copper, extending the row that has thus far been focused on thermal coal.  Australian copper accounts for only around 5% of China’s imports but China accounts for 55% of Australia’s copper exports.

China has also banned thermal coal, barley, sugar, timber, wine and lobster imports from Australia, as punishment for Australia’s insistence earlier this year on an international enquiry into the origins of the Coronavirus. 

Australian coal exports to China fell 47% year on year in October to 13.73 Mn T. According to the International Energy Agency’s Clean Coal Centre, Australia supplied more than 40% of China’s coking coal imports and 57% of its thermal coal in 2019.

As I reported in an earlier Macro Macchiato, the coal import ban is a nice coincidence for China, where the powerful coal mining lobby has encouraged domestic mining output increases as a way of supporting employment during Covid. China’s overall coal imports for October were down 26%.  Banning Aussie coal was easy as the politics came with no domestic economic cost.

This matters more to Australia as China is its main trading partner. Trade data from Australia’s Department of Foreign Affairs and Trade show exports from Australia to China were worth nearly A$ 140 Bn in 2019-20 along with around A$ 80 Bn of exports in the other direction from China to Australia.

China has not banned Australian iron ore (yet) as it buys 70 to 80 Mn T a month from Down Under – far too much to be replaced from other sources such as Brazil and India.

For the moment, Australia’s big mining companies have not issued any changes to their output expectations for 2020.  And the three biggest miners have large scale expansions coming up.

BHP’s South Flank mine is due to come on stream in 2021 and will eventually yield 80 Mn T a year.  This won’t provide a gross 80 Mn T a year increase in output as South Flank will over time replace the closing 80 Mn T Yandi mine. But South Flank will produce higher-quality iron ore and therefore increase revenues. 

Peter Beaven, the outgoing CFO of BHP told analysts on a June 2020 call, “we’ve got a licence to 290 million tonnes, and that’s all we can do at the moment. So if we ever wanted to really fully utilise what we’ve got in development for our system, we’re going to get licenced to go beyond. And that’s what we’ve applied for. And you know, it’s typical in resources that people take years and years to get licenses. So you want to get well ahead of that.” He noted that by debottlenecking the rail system, BHP could “squeeze up” to 290 Mn T but that beyond that, extra infrastructure could cost “probably USD 700, USD 600 million.” Having maintained production throughout Covid, BHP has kept its estimate for 2020 at 276-286 Mn T.

In its report for the quarter to the end of September, the outgoing Rio Tinto’s CEO JS Jacques said that Pilbara iron ore shipments for Q3 were 82.1 Mn T, down five % year on year, while output for the first nine months of 2020 was 241.7 Mn T, unchanged from a year ago. Actual production was up 4% on the previous quarter at 86.4 Mn T, but down 1% year on year. Production for the first nine months of 2020 was 247.4 Mn T, up two % year on year. The company said that, “A recovery in planned maintenance activity in the port led to 5% lower shipments.” Annualised 2020 production would be around 322 Mn T.  In its half-year results, Rio Tinto offered 2020 production guidance of 324-334 Mn T.

Rio is not standing still, it must be said, but its expansion plans have been subject to revisions this year. The greenfield Koodaidari Phase 1 began pre-strip in August 2019. This mine could eventually produce 40 Mn T a year of iron ore. But in August 2020 it was delayed as Rio warned that production costs were under pressure from Covid. The first iron ore shipments have been rescheduled from late 2021 to early 2022.  In November 2020, its airport officially opened  – eventually it will handle more than 600 workers a day in aircraft like Boeing 737 and Airbus 320.

Rio is 53% owner of the Robe River mine and operates two mines there, Mesa A and Mesa J.  Mitsui Iron Ore owns 33% and Nippon Steel Australia owns 14%. The mines produce about 30 Mn T a year, half their peak output. The Robe Valley expansion project is focused on the Mesa B, C and H deposits, following an October 2019 agreement on an A$ 1.55 Bn investment. The total expected iron ore reserves are around 370 Mn T. Construction is has begun in 2020 and first shipments are expected in 2021. If the mines were exhausted over 20 years, then production could be around 19 Mn T a year.

Even before recent difficulties over the demolition of ancestral sites in Australia, Rio had not published any significant expansion plans. The main beneficiary may be Fortescue Metals Group (FMG) which just announced a 5% year on year increase in output for the quarter to the end of September to 44.3 Mn T.  FMG also announced it had received approval to increase its licensed output through Herb Elliott facility at Port Hedland from 175 Mn T to 210 Mn T a year “on a staged basis.”  As FMG brings Eliwana onstream with plant commissioning in December 2020, it will need the extra shipping capacity. Eliwana could produce 170 Mn T annually over 20 years, once it is operating at full capacity.

FMG has also announced that its Iron Bridge mine project (31% held by Formosa Steel and 69% by FMG) is reported to be 85% complete with over contract sales of its output heading for 80 % by the end of 2020.  Iron Bridge will ship its first ore in H1 2022 if the project continues on schedule.  The deposit is estimated at 716 Mn T of 67% Fe content iron ore. With extraction over a twenty year period, output could be around 35 to 36 Mn T a year.

To top off a good quarter, FMG has reportedly signed 12 new agreements worth as much as USD 4 Bn with Chinese steel mills while attending the China International Import Expo, including a new long-term deal with its shareholder and long-term customer Hunan Valin Iron and Steel Group co. FMG’s CEO Elizabeth Gaines told reporters that, “Since the company’s inception, Fortescue has built enduring relationships with our stakeholders in China. Our engagement extends beyond iron ore supply to longstanding customer relations, procurement and financing arrangements as well as academic, policy and social linkages.”  She is emphasising the relationship but also the risk, and one might read her words as aimed at the Australian government as much as at shareholders.

So before everyone starts to worry about a new trade war in the Pacific, let’s focus on the reality: China’s coal import demand is falling after around 15 years of being a regular importer. But its iron ore demand remains significant, as does its investment in Australian iron ore. So from a shipping perspective, this is a bit ‘swings and roundabouts’ – lose on one, gain on the other.