Iron fist

The future of Australia’s coal exports look pretty assured. The International Energy Agency is forecasting that the growth between now and 2035 in China’s energy production will equal America’s, Europe’s and Japan’s current energy usage . Despite China’s falling carbon intensity, much of the expansion this will still come from coal. As I noted in a previous post, this was outlined in the Five Year Plan. But is the future of iron ore exports as assured? China is angry about the behaviour of the global cartel, and would like nothing better than to break it. The Financial Review has noted just that:

China wants to slash its reliance on Australia’s iron ore miners, detailing plans to secure 40 per cent of its iron ore imports from overseas mines under its ownership by 2015.

It is the first time that China has put a target on its ambitions to control its own destiny in iron ore.

 The process of breaking the cartel may be well under way. The economist David Hale said this in an interview on the ABC:

DAVID HALE: There’s a greater opportunity for China to break the cartel and that opportunity lies in West Africa. There have been major discoveries over the last two or three years of huge new major iron ore deposits all over West Africa, New Guinea, Sierra Leone, Cameroon. And Australian companies have played a very active role in this.

Right now there are about 25 new mines to open over the next 5 years. By 2015 they could be producing 620 million tonnes of iron ore per annum. Global iron ore trade last year was 930 million tonnes. This is a huge increase in supply.

ALI MOORE: That’s 4 years away.

DAVID HALE: Four years away.

ALI MOORE: Is that realistic?

DAVID HALE: Yes, it is, and this could set the stage for undermining the cartel that RTZ, BHP and Vale in Brazil have had over the iron ore price over many years. Australia is part of this boom. There are many Australian companies playing a role in this, but they don’t have capital, they’re underfunded. Guess where they’re going for capital? China. 

Maybe those low forward earnings multiples for Rio and BHP-Billiton (see the attached Deutsche reports) may not be so suprirsing after all.

Deutsche Rio

Deutsche BHP

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  1. “The International Energy Agency is forecasting that the growth between now and 2035 in China’s energy production will equal America’s, Europe’s and Japan’s current energy usage.”

    How ignorant this agency has to be to make such statement – exponential growth rate from past projected into the future. With such growth rates by 2035 there will not be enough fossil fuel to meet America’s, Europe’s, Japan’s and China’s energy usage.
    So there will not be energy consumption growth or fossil fuels will not play significant role. We already passed peak oil point. Expecting business as usual to continue is iresponsible

  2. If the IEA is so ignorant as to ignore peak oil (john cage above), I guess it’s no surprise it doesn’t seem to know about global warming, which will derail all such business-as-usual projections long before 2035. And no, I won’t be engaging in debate with anyone here who doesn’t believe global warming is real, I just want to note the gulf between much of the business world and what the real planet might be doing.

    • Geoff Davies

      “I guess it’s no surprise it doesn’t seem to know about global warming, which will derail all such business-as-usual projections long before 2035.”

      Highly suggest you go read the other side of things.

      It sort of like Osama telling everyone to fight for the cause and live/die out the wilderness while he lived it up in luxury. All you have to do is look at Al Gore. Suppose you are for the carbon tax as well.

      • All that has is a pile of news stories. Where’s the actual science?

        Denying AGW is delusional. We know humans are emitting carbon dioxide (we have good econometric data on that, and the volcanic emissions beloved of delusionists are nearly two orders of magnitude smaller). And the basic radiative physics of the greenhouse effect, and simple water vapour feedback, is quite straightforward.

        It’s possible that more complex climate feedbacks could somehow get the climate sensitivity down to zero, but the evidence for that would have to come from climate models (which delusionists claim to hate) – and as it is the best models we have estimate climate sensitivities that are decidedly non-zero.

        • With-out engaging…But,seems funny..
          The last time the world had a serious debt problem ,was the 70’s..You
          remember ‘Happy Days’,where
          Arnolds Diner had to raise the minimum from 30 cents to 50 cents…Funny they made a whole episode about it…70’s
          How about ,the Mork & Mindy,episode where Mork talks about safety suits for
          swine flu..70’s..and, How about oil..70’s… leading with
          The last time the worlds climate was in trouble ,Funny enough ,was the 70’s..

          So for this,my left-field Delusion,your guess..And the only improvment
          to the same situation we find ourselves today ,is ,
          Now the worlds heating….and we think we know why?..Funny that…and ..
          I’d say it has to get better ,like last time ..Hence what excuse will they use next….when Debt enslavement,turns on the worlds poor again…..n

          That’s all I see, happening for the next 200 years ,for this,..unless you’d like to report other-wise…no need state obvious,I’ve read…I’m not denying ..just questioning known correlations ,no science involved…

          cheers JR

    • In 1992 The Club of Rome, a premier international think tank, published a major report entitled ” The First Global Revolution”. Here is a quote from that report, “…in searching for a new enemy to unite us, we came up with the idea that pollution, the threat of global warming, water shortages, famine, and the like would fit the bill” ” It would seem that humans need a common motivation, namely a common adversary to organise and act together in the vacuum; such a motivation must be found to bring the divided nations together to face an outside enemy, either a real one or else one imagined for this purpose”.

      The United Nations has implemented this nefarious ideology in Agenda 21 in which Australia plays a part.

      Without getting into constitutional law – Australia’s Constitution fell under the UN’s charter after 1945. Hence you begin to understand why our government is hell-bent on ramming carbon tax down our throat – and it’s not just the $$$, it’s about control.

  3. Well, yes. It’s obvious that everybody’s building new mines to cash in on ore prices, and this will lead, eventually, to oversupply and a price collapse. That happens in every commodity boom.

    Of greater significance is the impact this will have on new projects. Currently, the big employers aren’t the miners themeslves, but the construction companies and associated services involved in building new projects. As soon as new production comes on line overseas, those projects will stop, and a lot of people will lose their jobs. If that happens while the rest of the economy is declining due to falling real estate prices, the outcome will be severe.

  4. What happens if this “huge increase in [iron ore] supply” meets a sharp slowdown in demand? This scenario is not even considered by Australia’s policymakers.

    As for coal, the Chinese still don’t buy much of our thermal coal. There was big spike in Chinese demand for coking coal during the post-GFC stimulus period, but that’s come off a bit. For both forms of coal, Japan is still a much more significant market than China.

    Good info here:

    China also has large reserves of its own coal, and can probably largely supply itself into the medium term. The same cannot be said of oil.

    I’d post another link, but my comment would probably go into moderation for a week.

  5. China signed a significant agreement with Russia late last year, which will make Russia its major supplier for oil and gas. To accommodate for this increase Russia has stepped up its program to drill more oil wells and build more refineries.

    In relation to China’s increasing demand for iron ore, I find it highly speculative since China is at the tail end of a massive internal stimulus. Unless China evokes a second stimulus, builds more ghost cities and/or increases their stockpiling rate – I can’t see a huge increase in demand.

    As for 2035 – who knows what type of world we will be living in.

    • Damn, forgot to include that OAO Rosneft, Russia’s largest oil producer, and China National Petroleum Corp. agreed to build a $5 billion dollar refinery in China late last year.

    • China Watcher

      @The Nod. Have you been to China recently? Go visit Ordos, the former Ghost City in Inner Mongolia. Today, it is the fastest growing city in the world. How else do you urbanise 15m people per annum? I could level the same ignorant “ghost city” assertions at Melbourne’s Docklands development which today, despite numerous corporate headquarters and residential towers, still feels empty and cold. And it has been a lot worse over the last 10-15 years of redevelopment there. My point is that i) you need to build new urban areas before they come, and ii) some western commentators are like rabbits in headlights when confronted by the sheer magnitude of absolute numbers in China.

      • China Watcher, they’re ghost cities until they’re occupied and I imagine that will eventually be the case. My concern is affordability and how long will it take?

        I have a friend who is a manufacturer in China and he has similar concerns.

  6. This “cartel” argument is nonsense. If it was a cartel they would have the power to hold back supply to prop up prices. Yet in the very same story he talks about 25 new mines to open in 5 years. Further to that, if the big 3 had cartel power then why didn’t they prop up prices in the really crap years in the past? The price rises over the past 5 to 10 years are due to a rush of demand – simple as that.

  7. The sea borne iron ore triopoly has been pushing to bring contract pricing closer to spot pricing.

    China wants to consolidate and rationalise the steel industry, i.e. the goal is for the top 10 producers to take approx. 50% of steel making capacity.

    1994 yuan at a high.
    1994 iron ore at US$10 tonne.

    In markets all prices set at the margin.

  8. Latest from Hanoi Conference:
    Protection of Regions reserves of US$6Trillion-($3T China + $3T rest), a high priority.

    Infrastructure is high on list of reserve deployment.

    Also long range weather and earthquake activity volatility to last to 2020 approx. (other sources).

  9. China Watcher

    If David Hale actually kicked tyres in the industry, he would understand that West Africa has zero probability of reaching 620Mt by 2015. Just like many Australian projects will continue to be delayed/more expensive than first thought.

    And China’s “wish” to boost equity iron ore tonnes from overseas is just that – a wish. Their experiences at the Sino Iron project demonstrates that China has a lot more to learn about operating in various overseas jurisdictions.

    Finally, @ The Lorax, I think the government (eg: ABARES) IS expecting commodity prices to fall as supply catches up to demand. How do you justify your assertion to the contrary?

    • China Watcher – you know your stuff. Anyone having involvement in projects out of West Africa well understands the realities and limitations of such ventures. Often overlooked is the grade quality of the ore/coal – obviously varies between mines – and is significant in mine viability. Your observation on Australian projects is spot on – something I have commented on here before. Re your China comments I am inclined to agree – the sheer magnitude of the demographic shift (rural to urban) is the driver – the ‘overbuild’ will not be such indefinitely. Look forward to your comments in the future.


  10. Hi China Watcher and welcome!

    Whilst I agree that it’s pretty foolhardy to assume a direct line of iron ore ramp up out of Africa, and that all Australian investment will come on stream, there is one almighty push on here. It’s still looks likely to end in significant surplus.

    And on Chinese apartments, point taken, but Docklands doesn’t have 65 million empties. Can you argue why this does not constitute an overbuild? Huw McKay at Westpac seems to think it does…And I found the recent Stephen Joske piece for EIU really, really thin…

    • China Watcher

      @Houses and Holes. Taking the 64m vacant apartments as a % of China’s total dwelling stock (for which estimates vary quite widely, as per usual with China’s stats) gets a percentage of something like 10%-13%.
      At any given time in Australia something like 9% of dwellings are vacant – sourced from ABS Census and/or HES data. So pretty easily I can explain most of the 64m away.
      There are other unique factors about China’s housing market that need to be taken into account, such as the fact that when SOE’s were reformed in the late 1990s, they usually gave their employees the houses that the SOEs had formerly provided to them. As incomes and house prices grew through the noughties, this cohort traded up from the 40-50m2 dwellings to bigger dwellings, say 90-100m2 plus. But a lot held onto these smaller older apartments as 1) storage, 2) for their kids, and 3) to rent (and the higher transitory occupancy that comes with this).
      This factor would likely bias a “lights on” estimate of occupied apartments that hedge fund gophers like to write about from time to time.
      I don’t believe China and its housing sector is without risk. But equally a lot of the western commentariat is ignorant to important current and historical context in China.
      Ultimately we do ourselves a dis-service to look at China through a capitalist democratic lens as China is no such economy. Calling a China blow up is akin to shorting the Party…