From The Australian:
There are 1700 workers on site in Western Australia’s Pilbara region, working on the port, rail and mine. That number will swell to 2000 at the end of the month and peak at 3600 by October.
It is well known Rinehart still needs to sign off on a $7bn funding package for her share of the joint venture but that hasn’t stopped work accelerating — proving that high-quality, low-cost projects will still go ahead in this market.
“It’s up and running — it’s not sitting around waiting for finance to go through,” one insider said.
…Huw McKay, senior international economist at Westpac, says a project with a quality resource, on a favourable part of the cost curve, can come to market and produce profitably.
“Imports are only 40 per cent of Chinese ore supply — it’s remarkable to think how much imports have grown over the last decade but they are still only 40 per cent,” he says. “I don’t think it’s ridiculous to think that what is a 60-40 market — Chinese home supply versus imports — can be 40-60. Australian exports will continue to grow. Even if China’s total steel production never grew again and was flat, you could still have strong growth in export volumes out of Australia as we take market share off inefficient Chinese producers.”
A few issues with this analysis. In commodity economics, the first and most basic principle is the cheapest mines are developed first (it’s not hard to figure out why). So, if this mine is so much cheaper than Fortescue’s production, why is it being developed so much later?
There are three possibilities. One, Roy Hill is not as cheap as is being made out and it is Gina’s wealth and personal goals that are driving the development. Two, Fortescue’s achievement is all the more remarkable given it jumped its place in the development queue. Three, commodity economics is sometimes wrong, which is more than possible.
Either way, nobody will be pleased with this project going ahead other than Gina and North Asian customers. The Chinese imports argument is fine but do not expect the shakeout to be smooth, swift or rational and in the mean time the price impacts will be steep. For Australia the iron ore yield will be cut in the short and medium term as prices fall further than volumes rise. In the long term the greater market share may pay off, so long as China doesn’t rebalance.
Pass the popcorn!
