Chinese government’s efforts to curb fog and haze polluting the cities and spruce up the steel industry are reforming the global iron ore market and pushing mining companies in South African to invest billions of dollars to remake the unpopular mines pits.
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In order to reduce excess capacity and improve air quality, China, the world’s leading steel producer, is phasing out more than 100 old inefficient blast furnaces. For the steel industry, China is replacing these furnaces with large factories to reduce coal consumption for smelting. The better way is to use a higher-grade iron ore, however, at present, the high-grade iron ore accounts for only a small portion of China’s annual trade of $100 billion in mineral products.
China’s shift in demand for iron ore has caused prices of some certain kinds of ore with higher iron content to rise. Now the iron ore can be divided into three markets: 58% low-grade material, benchmark 62%, and higher grade lump ore. It’s known that the benchmark price for iron ore, which has 62% iron-content, has risen by more than 50% since the beginning of 2016, to about $67 a metric ton. The lump ore, which can be directly sent to the blast furnace smelting, was strongly demanded in the market. Buyers are currently willing to pay nearly $20 a ton above the benchmark price of the lump products.
At present, existing mining companies such as Kumba Iron Ore Ltd. are benefiting from China’s demand. Kumba mines ore in an arid north area of South Africa. Its ore is mainly from a 65-year-old super mine named Sishen. The mine has an average iron content of 64.5%, which is 2.5 percentage points higher than the benchmark with 62% iron content. For Kumba, lump ore accounts for about two-thirds of its sales.
Last year, thanks to rising iron ore prices and demand for high-grade lump ore, and a cut in labor costs, Kumba’s net profit soared to 12.34 billion South African Rand. This data was only 469 million rand in 2015 (about $35.8 million).
As China implements the Air Pollution Prevention And Control Action Plan and cuts steel production capacity, Kumba’s fate is rapidly reversed. China buys about 60% ore from Kumba. In 2017, it became the best performing company on the Johannesburg Stock Exchange, and its share price has more than doubled.
However, this victory may be short-lived as many large iron ore producers have stepped up their mining of high-grade ore.
In June of this year, BHP Billiton Ltd., the world’s largest mining company by market capitalization and the third-largest mineral exporter, said it would build a new mine in Australia to increase its average grade of iron ore by a percentage point to 62%. Fortescue Metals Group Ltd., the world’s fourth-largest ore transporter, also said that its existing iron ore grade is low and will export high-grade iron ore.