Iron Ore for Dummies
Iron is the fourth most abundant element in the Earth’s crust and is usually found in ore deposits as an oxide.
There are many iron minerals, but the only ones of worldwide importance are hematite (Fe2O3), magnetite (Fe3O4) and limonite (FeOOH).
Other ores such as chamosite or pyrite are no longer important for iron production.
Typically, it takes 1.5 tonnes of iron ore and 450 kilograms of coke (an almost pure form of carbon processed from coking coal) to produce a tonne of pig iron – the raw iron that comes out of a blast furnace.
Pure iron is quite soft, however adding a small amount of carbon makes it significantly harder and stronger.
Western Australia dominates the Australian iron ore industry with nearly 97 per cent of total production.
The Pilbara region is particularly significant with 79.5 per cent of Australia’s total identified resources and 92.4 per cent of production. Other significant iron ore mines also operate in the Northern Territory, South Australia, Tasmania, Queensland and New South Wales.
Magnetite vs Hematite
Hematite (Fe2O3) is an iron oxide mineral that contains 70 per cent iron.
Hematite deposits vary widely in grade and until recently, most deposits needed to have an average grade of more than 60 per cent to be economic.
However, some deposits can now have iron grades of 56 per cent to 59 per cent and can still be commercially viable.
Magnetite (Fe3O4) is also an iron oxide mineral containing 72 per cent iron.
Magnetite ore however generally has a lower iron content than that of hematite and must be upgraded to make it suitable for steel making.
Processing of magnetite ore involves crushing, screening, grinding, magnetic separation, filtering and drying.
The final product is a high-iron grade magnetite concentrate (+65 per cent iron) with typically low impurities.
Further processing involves the agglomeration and thermal treatment of the concentrate to produce pellets which can be used directly in a blast furnace.
The additional processing cost for the magnetite concentrate can generally be offset by the premium price which it attracts from steel mills due to the high iron content.
Market perception of magnetite
Traditionally, Australia has associated ‘iron ore’ with Direct Shipping Ore quality hematite, which has been underpinned the development of the Pilbara region as one of the world’s great iron ore provinces.
As a result, magnetite has typically been somewhat misunderstood and undervalued by the market.
Sixty per cent of global steel production is sourced from magnetite projects which today are capable of producing high-quality concentrate grading up to 68 per cent to 69 per cent iron.
This is higher grade than many of the Pilbara hematite lump and fines ores currently being produced.
It is also well established that hematite grades are generally declining globally and impurity levels are rising while the demand for quality, premium steel from China and India is continuing to increase.
With hematite grades declining, high-grade magnetite concentrate is becoming an increasingly sought-after product.
The Outlook for Steel
About 98 per cent of world iron ore production is used to make an iron alloy in the form of steel.
Steel is the most useful metal known to man and is used 20 times more than all other metals put together.
So the direction of steel pricing and demand is important in determining iron ore demand and pricing.
The World Steel Association recently released its October 2011 Short Range Outlook for 2011 and 2012.
It forecasts steel use will increase by 6.5 per cent to 1,398 million metric tonnes (mmt) in 2011, following growth of 15.1 per cent in 2010.
In 2012, it is forecast that world steel demand will grow further by 5.4 per cent.
The Association expects to see growth performance varying widely across regions.
The recovery of steel demand in the developed world will likely be slow, whilst most of the emerging and developing world should continue to enjoy robust growth in demand.
Iron Ore Prices & Iron Ore Inventories, Source: Mysteel, TSI
China’s apparent steel use in 2011 is expected to increase by 7.5 per cent to 643.2mmt following 8.5 per cent growth in 2010.
In 2012, steel demand is expected to maintain 6.0 per cent growth, which will bring China’s apparent steel use to 681.6mmt.
In 2011, India’s steel use is forecast to grow by 4.3 per cent to reach 67.7mmt due to economic growth.
In 2012, the growth rate is forecast to accelerate to 7.9 per cent.
Source: World Steel Association
The WSA’s current forecast suggests that by 2012, steel use in the developed world will still be at 15 per cent below the 2007 level whereas in the emerging and developing economies, it will be 44 per cent above. In 2012, the emerging and developing economies will account for 73 per cent of world steel demand in contrast to 61 per cent in 2007.
The Outlook for Iron Ore Prices
Perhaps the most remarkable aspect of the recent dramatic decline in iron ore prices is not the actual fall in prices.
Rather, the most intriguing thing is that no-one appears to be able to offer a concrete explanation as to why it’s actually happening.
The size and scale of the recent iron ore price declines has taken everybody by surprise. We have to go back to the depths of despair reached during the GFC to find price volatility on this scale – and even then it wasn’t this bad.
Prices are fluctuating by more than US$10 per tonne on a daily basis.
There’s speculation in some quarter that prices could drop to as low as US$90/t.
The explanation seems to involved higher inventory levels within China as well as the nation’s tighter credit policy.
I wouldn’t rule out the prospect of prices drifting lower in the near-term, but the situation should correct itself fairly quickly.
The reason for iron ore price optimism is the strong inherent steel demand within China.
The current depressed iron ore price levels are irrational and unsustainable.
Don’t forget that China likes to manipulate demand and supply where it can – cast your mind to the fact China controls around 95 per cent of the rare earths market currently and you get a clear picture of the control that the country can exert.
China is such a huge market for iron ore that it can manipulate prices based on withdrawing purchases from the market.
Also remember that quarterly iron ore contract prices are currently being negotiated, so what better time for China to put downward pressure on spot iron ore prices than now – given that weak spot prices will feed into quarterly contract pricing.
What’s clear is that the current rapid pace of de-stocking in China is not in any shape or form sustainable, meaning steel mills will have to sooner or later re-establish purchasing, thus driving prices higher once again.
There’s every chance that iron ore prices will have recovered and be trading between $130/t – $150/t by the end of 2011/early 2012.
Gavin Wendt is the founder of MineLife, publisher of the MineLife Weekly Resource Report 