China's Ancient Compasses Point to Fortescue Iron Expansion

16 November 2015

More iron ore is probably the last thing the world needs at the moment, though that’s not stopping the fourth-biggest exporter looking at boosting output capacity in Australia.

The reason lies in the type of iron ore -- magnetite, which commands a premium from mills in China that produce high-quality steel. Chunks of the mineral, known as lodestones, were used as early as the 7th Century as compasses by Chinese navigators, according to UBS Group AG.

So even as iron ore prices slide amid faltering demand and oversupply, Fortescue Metals Group Ltd., sees a stronger case for developing its Iron Bridge magnetite joint venture with China’s Baosteel Group Corp. and Taiwan’s Formosa Plastics Corp.

The project holds Australia’s largest resource of iron ore -- about 5 billion metric tons of mainly magnetite ore -- and a decision on funding an increase in output from about 1.5 million metric tons a year to about 10 million tons is planned for the first half of 2016, according to the company.

The exit of higher-cost output as iron mines shutter globally from Sweden to China is restricting supply of magnetite ore in particular, Chief Executive Officer Nev Power said in an interview. “We are going to see a higher demand for magnetite concentrate than we have seen in the past,” he said.

Open Space

Magnetite accounts for only between 15 to 20 percent of the seaborne export market, according to researcher AME Group. The export trade, of about 1.4 billion tons a year, is dominated by hematite ore. Fortescue capped its shipments of hematite products in July and has been a vocal critic of rivals who are continuing to boost exports.

“The exit of Chinese domestic concentrate could increase the demand for magnetite products,” Caue Araujo, iron ore industry director at AME in Sydney, said in an e-mail. There’s likely to be “a significant reduction in Chinese concentrate output until 2017, which could open enough space for an Iron Bridge expansion,” he said.

Joint venture partners plan to evaluate whether to carry out the second phase based on current market conditions, Formosa Ha Tinh Steel Corp., the Formosa unit handling the project, said in an e-mailed response to questions. Zhang Wei, an official at the press office of Baosteel, declined to comment.

Most production in Australia, the largest iron ore supplying nation, is of the hematite ores, a reddish mineral that requires less processing before it’s used by steel mills. Magnetite, a black magnetic mineral, is processed into high iron content concentrate and favored for premium quality steel.

Steel Balance

Fortescue fell 1.3 percent to A$2.25 in Sydney trading Monday, extending its decline this year to 18 percent.

Formosa Plastics agreed in 2013 to invest about $1.15 billion in Iron Bridge, which had an estimated capital cost of $340 million for construction of its first stage, according to a 2013 filing. Fortescue spokesman Luke Forrestal said the producer couldn’t provide details of the expected cost of the operation’s second stage

Formosa has a 31 percent stake in the Iron Bridge project, with FMG Magnetite Pty holding the remainder, according to filings. Baosteel owns 12 percent of FMG Magnetite and Fortescue has the remaining 88 percent, the filings show.

“It’s a tough market to be bringing any new project into,” Power said in the interview on Thursday in Melbourne. “We are very confident about it, we haven’t made the decision yet and it’s a decision we need to take with our partners. Hopefully we’ll have a better sight on the Chinese economy and Chinese steel industry before we do that.”

Slumping Prices

Benchmark iron ore prices have tumbled 32 percent this year amid weaker demand in China’s steel sector. Ore with 62 percent content rose 0.7 percent to $48.14 a dry metric ton on Friday, according to Metal Bulletin Ltd. data.

While magnetite ore needs additional processing, adding to costs, the eventual products are priced at a premium to the benchmark, according to Gindalbie Metals Ltd., which supplies the material from a mine in Western Australia.

Any attempt by Fortescue to seize on stronger demand for magnetite ores faces competition from rival projects, including Citic Ltd.’s Sino Iron mine in Australia, which began exports in 2013 and is seeking to expand to annual production of 24 million tons.