Monsters of Rock: China rocks the boat on iron ore demand

China has reportedly published a new plan aiming to strike at the heart of the Australian economy by taking control of its iron ore supply.

According to the Australian Financial Review, a report in China’s state-owned Economic Daily has outlined in detail the world’s biggest steelmaker’s plan to become self-sufficient and reduce its symbiotic reliance on Australia’s Pilbara iron ore miners.

The AFR’s Michael Smith says the plan involves increasing Chinese domestic iron ore production by 30%, investing in overseas mines like the Simandou development in Africa and ramping up scrap steel supply.

The news comes after both an escalation in tensions between Australian and China and a dramatic slowdown in Chinese steel production that has seen iron ore prices slide from records of more than US$230/t in May to around US$105/t today.

“The control of overseas iron ore resources is obviously insufficient, and more than 80 per cent of the import volume comes from Australia and Brazil. The risks to resource security are prominent,” Chen Ziqi, an adviser to the Chinese Government and senior executive at China International Engineering Consulting Corp said in the report.

According to the report, Chinese steel executives and officials want to ramp up domestic production of iron ore by over 100Mtpa to 370Mt by 2025, increase scrap steel usage from 230Mt in 2020 to 340Mt in 2025 and plans to have 20% of its imports come from mines with majority Chinese equity stakes, up from 8% today.

Can China do it?

China’s capacity to diversify supply away from Brazil and, in particular, Australia has been questioned by many analysts.

The mine, rail, port and sea freight network that links the Pilbara iron ore businesses owned by BHP (ASX:BHP), Rio Tinto (ASX:RIO), Fortescue Metals Group (ASX:FMG) and Roy Hill to China has been described as a “conveyor belt”, such is its reliability.

Its own iron ore mines were big producers more than a decade ago, before declining reserves and safety issues saw output halve from around 500Mtpa to ~250Mtpa in 2018.

China has boosted domestic production around 15% this year to date, Westpac IQ’s Justin Smirk said this month.

“Chinese iron ore production (on an fe 62% basis) declined from over 500mt almost ten years ago to less than 250mt in 2018 due to pollution mitigation campaigns along with a focus on health and safety issues,” he said.

“From the trough in 2018, Chinese ore production is set to rise to over 320mt this year then continue on to 380mt by 2025.”

China has made plans to ramp up scrap steel imports this year, but there are currently technical and financial limits to its use.

In particular, China’s steel industry is still dominated by blast furnaces which are largely fed by standard grade iron ores rather than the electric arc furnaces in which scrap is a major input in the steelmaking process.

A lot of focus outside China has been on the Simandou iron ore mine in Guinea, sometimes dubbed “the Pilbara Killer”.

Despite a coup in the African nation a couple months ago, local media reports last week stated the Chinese backed consortium behind developing two of the blocks and a 670km rail network across Guinean countryside told the interim government they remained committed to having the project built by the end of 2024 with first production in 2025.

Having recently restarted work on Simandou it halted in 2015, Rio could make an investment decision on the two blocks it owns with Chinese miner Chinalco in 2022 according to a note this week from UBS.

China imports around four-fifths of the ~900Mt of iron ore Australia exports each year, a $150 billion contribution to the Aussie economy.

Dacian raises cash for Mt Morgans

Dacian Gold (ASX:DCN) has returned to the market chasing cash for its Mt Morgans gold mine near Laverton in WA’s Goldfields.

The $200 million capped gold miner entered a trading halt today seeking $20 million in a fully underwritten raising to complete pre-stripping at its “thicker, higher grading” Doublejay orebody by March 2022.

It will also accelerate an extensional drilling program at the Jupiter deposit, with a second diamond rig mobilised to the mine site to deliver a 9 hole, 7500m program.

Dacian will have cash and gold on hand before costs of $36.8m.

The gold miner produced 15,819oz at an AISC of $2,362/oz in the September quarter, with FY2022 guidance of 100,000-110,000oz at an AISC of $1550-$1700/oz.