Iron Ore's Supply vs. Demand

Sealift on Baffin Island; photo courtesy of Baffinland Iron Mines Corporation

story published by EPCM World

Baffinland (acquired in 2010 by the world’s largest steel manufacturer ArcelorMittal) owns what is potentially the world’s largest supply of undeveloped iron ore. The prized Mary River Project, located on North Baffin Island, in the Qikiqtani region of Nunavut, is “a proposed 18 million tonne per annum iron ore mine,” and is by far the most significant development ever planned above the Arctic Circle. Mining the ore in this area is complex process, and given the location’s remoteness, shipping the ore for process will be equally challenging.

Iron ore is a one billion tonne per year industry. Adam Low (CFA), an equity researcher for Raymond James Ltd., predicts that “Most of the supply is going to come from Western Australia, from two of the world’s largest iron ore producers – BHP Billiton and Rio Tinto.” Both companies have major expansion projects in the Kildare area of Western Australia, making up some 100-200 million tonnes of the world’s mined iron ore.

Though Western Australia is the world’s largest exporter of iron ore, production is beginning to show some cost escalation. Low explains, “Cost pressures are something we’re seeing throughout the entire mining industry. And in most extractive resource industries, not just iron ore or mining specific.” Low believes this inflation is in large part due to “the mining boom that’s been going on for a decade or more – for instance we’re seeing quite a bit of wage increases in Western Australia that are fairly dramatic to what they are in other parts of the world.”

Cost pressures elsewhere could be one of the reasons that ArcelorMittal is so committed to iron ore growth in Canada, and why Black Iron is willing to brave an uncertain political climate in the Ukraine for their Shymanivske Project, projected start 2017.

Can the world supply keep up with demand?

One minerals analyst who prefers to remain anonymous says he expects the supply to underperform demand. “You’ll see more supply coming out of Canada and Australia, but I think a lot of African projects may struggle to get off the ground. I think eventually they’ll get developed, but it will probably slower and longer than people expect.” However, he does believe that demand for iron ore will remain steady well into the decade. “If you believe in the Chinese growth story, then that demand remains firm. That high-cost Chinese supply is needed to balance the market.”

Low agrees, adding, “These major Australian projects [produce] 100 to 200 million tonnes per year,” while Black Iron might produce 8 million tonnes per year, and Baffinland “probably starting at 4 million tonnes per year, and ramping up to about 18 million tonnes per year.  So they’re both still a fairly small drop in the bucket in terms of world-wide supply.”