By Stuart Burns
The scale of the iron ore mining industry is mind-boggling. Some 95% by weight of all metals production is in the form of steel, and with the exception of scrap feed for the EAF market in the U.S. and Europe, much of that is supplied as iron ore. No wonder the seaborne iron ore freight market is taken at times as a bellwether for the global economy -- the steel produced is consumed in just about every facet of modern life.
Supply of that iron ore, though, is surprisingly concentrated into not just a few major iron ore mining firms, but even within them into a limited number of major deposits around the world. It's sufficient enough, it should be said, that there are no major supply risks even when (as now) parts of Australia are hit by cyclones or India goes through its monsoon season. But only standing at the bottom of an open cast mine and looking at the Grand-Canyon-sized-scale of the operation can one appreciate the sheer scale of global iron ore operations.
One such example is Vale's (NYSE:VALE) Carajás Mineral Province in the state of Pará in Northern Brazil. Ironically, U.S. Steel first discovered it when one of its helicopters was forced to land on a hill in the area to refuel in 1967. The first mine, N4E, came on-stream in 1985, producing just one million metric tons of iron ore. Now, Carajás is producing over 110 million tons with plans in place for a massive U.S.$20 billion investment in the new S11D project to bring total output up to 230 million metric tons by 2016, according to Business Media Mining. S11D is said to yield the highest purity, naturally occurring iron ore in the world at 66.48%, and the S11 ore body alone is estimated to comprise over 10 billion tons of ore.
Vale already owns the S11 concession, for which it paid some $8 billion, and is planning to spend another $11.4 billion on infrastructure to reach full iron ore production, according to Reuters -- an investment beyond the limits of some small states, let alone a single project for a mining company. The phrase "putting all your eggs in one basket" springs to mind, but in Vale's case the risk is not so much that iron ore demand for steelmaking will not be there to absorb the production, as the project will overrun on costs.
Anglo American (OTCPK:AAUKY), a highly experienced miner, if not a major iron ore producer, has faced permitting delays and massive cost overruns due to equipment and labor cost increases on its Minas-Rio iron ore project in Brazil. Although part of the firm's eye-watering $4 billion writedown of its book value is a reflection of the top of the market timing for the $5.5 billion purchase price of Minas-Rio (in two stages in 2007 and 2008), a large chunk has been down to delays and cost escalation in the industry.
It has taken Anglo years to secure the 300-odd permits required for the mine -- a performance Vale will no doubt hope to improve on with S11D, due to its depth of experience working in the province over the last 30 years. Cost escalation, though, will not go away anytime soon, with the twin draws of soccer's World Cup next year and the Olympics in 2016 sucking labor and materials into major stadium and infrastructure projects.
Still, it is good to see Vale sticking to its knitting and spending money in the mining sector, rather than trying to diversify into downstream operations like Rio's Alcan purchase. More often than not, firms that stick to what they know best generally prosper better than those that try to be all things to all people.