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Driving along the Great Northern Highway through Western Australia’s remote Pilbara region at sunrise is a unique experience.

A landscape of gold, red and green surrounds you, the sky glows with a pink hue and the air is crisp.

Underneath all that natural beauty lies the single most valuable thing to Australia — iron ore.

Rio Tinto’s iron ore trains stretch up to 2.4 kilometres and carry as much as 28,000 tonnes of iron ore in a single trip.(

The commodity helped shave $50 billion off the recently revealed budget deficit, it’s what Western Australian Premier Mark McGowan fought to protect with his hard border last year, and it’s been one of the few sectors to excel as others have been crippled by COVID-19.

It’s as good as gold. Actually, it’s better.

And never has it been a better time to be an iron ore miner.

BHP’s Mt Whaleback mine is the company’s oldest in the Pilbara, having opened in 1968.

Earlier this month, spot iron ore reached a new high, nudging $US240 a tonne.

A year ago it was worth less than half that and at its previous peak during the mining construction boom a decade ago, iron ore reached about $US190 a tonne.

As the biggest supplier of seaborne iron ore in the world, Australia has been cashing in.

“We’ve seen record prices, but we’ve also seen right across the resources sector that the expectation is in this year, in the midst of a pandemic, we will break all records for exports of energy and resources,” federal Resources Minister Keith Pitt says while on a tour of BHP’s 53-year-old Mt Whaleback mine in the Pilbara.

Federal Resources Minister Keith Pitt tours BHP’s Mt Whaleback mine.

BHP is the second-largest exporter of iron ore and Mt Whaleback is its oldest mine, with another 15 years left to run.

Last week BHP opened its newest mine, South Flank.

The miner is on track to export up to 255 million tonnes of iron ore this financial year.

 

BHP’s new South Flank mine has just started production.

Australia’s iron boon

Iron ore is Australia’s single largest export and Treasury predicts the value of that market will increase from $103 billion last year to $136 billion this financial year.

As the value of the commodity rises, the miners’ profits increase and so too do the amount of tax and royalties they pay the federal and state governments.

He is in the Pilbara for the first time since becoming the minister last year.

“What I see here is a very dedicated workforce who are incredibly proud of their industry, as they should be,” he says.

“They are incredibly efficient and that means they’re cost competitive in markets right around the world and that holds them in good stead.

“Now there is a shortfall which is driving up prices and Australia is in a position to take advantage of that — and that’s great,” Mr Pitt says as he gazes into the gaping hole of the Mt Whaleback iron ore pit.

 

BHP’s Mt Whaleback mine is estimated to have another 15 years of operational life, despite already being 53 years old.(

Can it last?

The soaring iron ore price is a classic case of supply and demand.

Australia’s global iron ore dominance hasn’t had any decent competition since January 2019, when production from the second-biggest exporter, Brazil, was significantly curbed after the Samarco dam collapse.

The South American country has spent the past year crippled by COVID-19, further hampering its production and leaving Australia as the only substantial supplier of the critical steel-making ingredient.

At the same time, China’s economic expansion has continued, led by high-rise and infrastructure construction, consuming vast quantities of steel.

In April its steel production hit an all-time high.

China’s National Bureau of Statistics says in the first four months of the year, the powerhouse produced about 16 per cent more steel than the same period last year.

“We are in a very strong market,” Fortescue Metals’ chief executive, Elizabeth Gaines, tells The Business.

 

Fortescue CEO Elizabeth Gaines is optimistic about the future of demand for Australian iron ore.

“That very strong demand is actually resulting in the price environment we’re seeing currently.”

FMG is the third-largest exporter of Pilbara iron ore and it expects to ship as much as 182 million tonnes from its Port Hedland port operations this financial year.

But some are predicting the price — and it’s not great news.

“Our forecast for iron ore is to come back to about $US110 a tonne by the end of this year,” CBA’s mining and energy economist Vivek Dhar says.

 

Vivek Dhar is the director of mining and energy commodities research at the Commonwealth Bank.

Iron ore prices have already fallen about 20 per cent from the high recorded just a couple of weeks ago and are now comfortably below $US200 a tonne.

Capital Economics senior economist Marcel Thieliant recently published a note saying: “As China’s property investment slows and developers face tighter financing constraints, we expect the iron ore price to fall to $US140 by year-end.”

“It doesn’t take much shift in demand to really see a big shift in terms of pricing,” Mr Dhar explains.

“Once that demand appetite, or concerns over demand, increase, we could see iron ore prices correct, and our expectation is that it’s likely to correct further. The question is just on timing.”

 

A Fortescue Metals iron ore train prepares to unload at the company’s Port Hedland facilities.

A symbiotic relationship

China has imposed tariffs on a number of Australian products in the past year, but few expect it to do that with iron ore.

According to global financial services firm UBS, China buys about 70 per cent of the iron ore Australia exports, which in turn makes up about 60 per cent of all the iron ore China imports.

To put it frankly, they need us and we need them.

The iron ore Australia ships from the Port Hedland and Dampier ports in the Pilbara is worth about 5 per cent of Australia’s GDP.

It’s about 20 per cent of all of our exports.

A reclaimer at Fortescue’s Port Hedland facilities picks up and blends iron ore ready for loading onto waiting ships.

“We have a strong relationship with China and we want that relationship to continue,” Mr Pitt says.

“We do have trade arrangements in place. We expect all of our trading partners to meet the requirements of those trade agreements, including China.”

Any cuts to Australia’s iron exports would have a significant impact on the economy and government budgets.

“In the financial year ended June 20, the total company tax paid by miners was around $24 billion,” Ms Gaines explains.

But everyone likes a bargain and China is starting to do what it can to drive down prices as well as its reliance on Australian iron ore.

One way it’s looking to do this is by expanding its own iron ore production, both in China and by bringing online its majority state-owned Simandou site in Guinea, west Africa.

Rio Tinto is a part-owner of that site too.

“We discovered Simandou back in the 90s,” says Rio Tinto’s recently appointed chief executive of iron ore, Simon Trott.

Rio Tinto’s chief executive for iron ore, Simon Trott, says the company has a good relationship with its key Chinese customers.

“About 1.9 billion tonnes of seaborne iron ore is required each and every year and so the market will need those tonnes which will be complementary to our business in the Pilbara.

“Particularly in the context of our steel industry that’s changing, customers’ demands are changing and so the Pilbara business, Simandou and also our iron ore company in Canada position us really well to respond regardless of the way the steel industry evolves.”

A year on from blasting the Juukan Gorge Caves, Rio Tinto is still repair mode.

“It should never have happened. We’re sorry that it occurred and we’re sorry for our mistakes,” Mr Trott says.

Despite that and a major leadership overhaul, including the appointment of Mr Trott, Rio Tinto is on track to export up to 340 million tonnes of Pilbara iron ore this calendar year.

Rio Tinto is expecting to export up to 340 million tonnes of Pilbara iron ore this year.
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Capital Economics believes Simandou will come online in the next decade.

Its economists also told an investor briefing this week they expect China to increase its use of recycled steel as it moves to curb its carbon emissions, which will contribute to a reduced reliance on Pilbara iron ore.

“In the short run, China has no choice but to grit its teeth and keep buying Australian iron ore, even as bilateral ties continue to fray,” Capital Economics senior China analyst Julian Evans-Pritchard said.

“But this dependence will diminish over time thanks to increased supply from other sources, greater use of recycled steel and a structural decline in Chinese steel demand.

Is the sun about to set on Australia’s massive iron ore export trade to China?

But most analysts think that’s unlikely.

“I do believe Australia’s position is going to be still very strong,” Mr Dhar says.

“It’s just something that we don’t see, from a volume perspective, being invested in such a way that Australia is really at risk from being displaced as the number one exporter of iron ore.”

It just won’t be worth as much.

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