Rio Tinto, BHP Billiton or Fortescue, which together exported a staggering $4.7 billion in iron ore in June, according to the Bureau of Statistics. Iron ore has now vaulted above steal-making and thermal coal combined. The value for July will be substantially higher, reflecting new quarterly contract prices, and they will ease back again from October. This will mean the value of Australia's iron ore exports will rise from a staggering 4 per cent of national income in the June quarter to about 5 per cent in the September quarter.
This is the sort of data Treasury officials (and others) in China were feeding back to Canberra but which somehow failed to show up in budget revenue forecasts. The contents of Wang's iron ore pit will constitute just 0.00000003 per cent of China's iron ore production this year, but it neatly illustrates a big problem in working out where Australia's economy is headed. Industry analysts and economists have a fair handle on iron ore demand. Chinese steel production fell 3 per cent in May-June and as much as 9 per cent after adjusting for seasonal factors, according to Ben Simpfendorfer at Royal Bank of Scotland. But tens of thousands of backyard miners like Wang mean that nobody, and least of all Chinese statisticians, have a firm grasp of the supply side of China's iron ore price equation. Australian miners and analysts are left to imply production data or send out survey teams to inform an educated guess. Those survey teams are now back out in force, after lying low in the wake of the arrest of Stern Hu.
Industry sources say Chinese iron ore production has surged in parallel with prices since Chinese New Year. In raw terms, Chinese miners are now digging at the astonishing rate of 1 billion tonnes a year. Whereas Australian miners don't bother with iron ore grades lower than 55 per cent, the best estimates are that China's average iron ore grade has fallen from a bit less than 30 per cent to about 24 per cent in the past four years. In high-grade equivalent terms, China is now producing at an annualised rate of 380 million tonnes, which is only a fraction short of its 400-million-tonne peak before the financial crisis and almost double what it was at the worst of the crisis. Collectively, China's iron ore miners are an enormous swing factor, which partly stabilises prices. Producers at the top third of the Chinese cost curve - even those with iron ore content of less than 10 per cent - have been digging at close to full throttle since domestic spot prices rose above about $US120. They will fall away when prices drop below that threshold.
Iron ore spot prices have recently surged back up to about $US150 but they will fall back after the Indian monsoon - which is taking about 7 million tonnes from Chinese imports each month - and when Brazil's Vale gets its production house back in order. Further out, prices will steadily slide as Rio, Vale and BHP, and even China's new overseas mines, steadily increase production.
While Wang has been scraping wafer-thin margins out of the Tumen River, it is worth considering that Rio Tinto and BHP are mining iron ore in the Pilbara at a cost of about $US20 a tonne and paying freight to China of between $US8 and $US10. Rio is receiving a little under $US160 in this September quarter and is on track to get a bit under $US130 for the December quarter (BHP is getting less but only because of timing differences). Subtract those production and freight costs from contract prices and you can begin to grasp what luck it is to be an Australian at the peak of a once-in-a century resource boom.
Source: The Age
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