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### Have Your Say Neither accelerated mine capacity expansions nor measures to cool China's overheated steel sector have removed the tightness from international iron ore markets. Iron ore demand is at record levels and is set for continued strong growth. A new report from Sydney-based AME Mineral Economics, Moths to the Flame, shows how expanding steel production in China is driving iron ore industry development. The report also shows how ambitious steel sector development in India and Brazil, along with steel industry revitalisation in Russia and other countries in transition, will further boost global demand growth. AME forecasts that annual world iron ore consumption will increase from 1.3 billion tonnes this year to more than 1.6 billion tonnes by 2009. Attracted 'like moths to the flame' to this white-hot market, established producers - large and small - as well as new hopefuls are rushing to create extra capacity. The global Big Three (CVRD, Rio Tinto, and BHP Billiton) - who between them control more than three quarters of seaborne iron ore trade - have already put massive expansion plans in place. A raft of other proposed projects span the globe, from the major iron ore producing countries of Australia and Brazil, to India, Africa, and even Sweden and North America. Nevertheless, these will do little to ease market tightness in the short term. Steelmakers, in some cases already suffering from raw material constraints, have been hurrying to secure supply for next year and beyond through long-term contracts with iron ore producers. AME, therefore, forecasts iron ore prices to rise by over 20 percent in 2005. This follows the 18.62 percent increase in benchmark prices for iron ore fines this year, which lifted prices to record highs. Beyond 2005, strong demand will keep prices high, but we expect that steel price corrections and new iron ore supply capacity will allow real-terms iron ore prices to ease, although pellet prices may at least hold in real terms. 

### A major factor behind the iron ore demand surge is that the blast furnace process is increasing its dominance of world steelmaking. Electric arc furnace (EAF) capacity grew rapidly from the 1970s until the mid-1990s, but since then the EAF share of world steel production has stagnated. China's steelmaking expansion is chiefly based on blast furnace technology. The availability of low-capital Chinese-designed blast furnace and ancillary technology, along with fundamental shortages of electricity and scrap, are dampening the growth of EAF steelmaking in China. In the face of scrap supply limitations in other developing countries, particularly those with abundant iron ore reserves such as India and Brazil, pig iron - supplemented by direct reduced iron (DRI) - will underpin steel capacity growth. This means that iron ore demand will grow at least as strongly as steel production. Seaborne iron ore trade will expand even more rapidly, since most of the demand growth is coming from Asia, led by China, which is becoming heavily dependent on imported quality iron ore. China's iron ore imports have risen from Your Email
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Neitheraccelerated mine capacity expansions normeasuresto cool China's overheated steel sector have removed thetightnessfrom international iron ore markets. Iron ore demand is at record levels and is setfor continued strong growth.
A new report from Sydney-based AME Mineral Economics, Moths to the Flame, shows how expanding steel production in China is driving iron ore industry development. The report also shows how ambitious steel sector development in India and Brazil, along with steel industry revitalisation in Russia and othercountries in transition, will further boostglobal demand growth. Iron Ore

AME forecasts that annual world iron ore consumption will increase from 1.3 billion tonnes this yearto more than 1.6 billion tonnes by 2009. Attracted 'like mothstotheflame' to this white-hot market, established producers -large and small- as well as new hopefuls are rushing to create extra capacity. The global Big Three (CVRD, Rio Tinto, and BHP Billiton)

- who between them control morethan three quarters ofseaborne iron ore trade

- have already put massive expansion plans in place.A raft ofother proposed projects span the globe, from the major iron ore producing countries ofAustralia and Brazil, to India, Africa, and even Sweden and North America. Nevertheless, thesewill do littleto ease markettightness in the shortterm. Steelmakers, in some cases already suffering from raw material constraints, have been hurrying to secure supplyfor nextyear and beyond through long-term contracts with iron ore producers. AME, therefore, forecasts iron ore prices to rise byover20 percent in 2005. This follows the 18.62 percent increase in benchmark prices for iron ore fines this year, which lifted pricesto record highs. Beyond 2005, strong demand will keep prices high, butwe expectthatsteel price corrections and new iron ore supply capacity will allow real-terms iron ore prices to ease, although pellet prices may at least hold in real terms. A majorfactor behind the iron ore demand surge is thatthe blastfurnace process is increasing its dominance ofworld steelmaking. Electric arcfurnace (EAF) capacity grew rapidly from the 1970s until the mid-1990s, but since then the EAF share ofworld steel production has stagnated. China's steelmaking expansion is chiefly based on blastfurnace technology. The availability of low-capital Chinese-designed blastfurnace and ancillary technology, along with fundamental shortages ofelectricity and scrap, are dampening the growth of EAF steelmaking in China. In theface ofscrap supply limitations in otherdeveloping countries, particularly those with abundant iron ore reserves such as India and Brazil, pig iron

- supplemented by direct reduced iron (DRI)

- will underpin steel capacity growth. This meansthat iron ore demand will growat least as strongly as steel production. Seaborne iron oretradewill expand even more rapidly, since mostofthe demand growth is coming from Asia, led by China, which is becoming heavily dependent on imported quality iron ore. China's iron ore imports have risen from 

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### 70 million tonnes in 2000 to 148 million tonnes in 2003. Pic of the Month This year, China should import close to 200Mt, giving imports a share of more than 40 percent of China's total iron ore supply. However, Chinese domestic iron ore is generally low grade, and if this is taken into account, the imported ore share is closer to 60 percent on a contained iron basis. AME expects that total Asian iron ore consumption will grow from 655Mt in 2003 to more than one billion tonnes by 2010, providing the primary boost for global iron ore trade. Meanwhile, the traditional major iron ore markets Europe and Japan will remain relatively flat, with incremental steel industry growth expected in South Korea and Taiwan. The trend in North America will also be flat, following the current period of steel industry restructuring and revival. In contrast, there is much interest in steel development projects in India and Brazil. These countries have the potential to widen the range of possible future iron ore demand scenarios. Global Iron Ore Consumption In India's case, there is a desire to match China, which became the first country to produce over 200 million tonnes per year of crude steel in 2003. India hopes to reach of 60 million tonnes per year by 2010, having produced 32 million tonne last year. This steel sector growth is stimulating India's iron ore industry, which burst onto the world scene in recent years as a major exporter. India became China's second-largest supplier (after Australia) in the first half of 2004. AME expects rising domestic demand to cap India's iron ore exports as the decade unfolds. Brazil's steel industry development is being supported and facilitated by its mining major CVRD, as it strives to increase domestic consumption of its ore. Brazilian steelmakers currently aim to lift crude steel production by 10 million tonnes per year by 2008. However, there are also many potential projects being considered there, involving some of the world's leading steel companies, including China's Baosteel, South Korea's Posco, and European giant Arcelor. These could form part of a 24 million tonnes per year steel centre that CVRD recently proposed for Northern Brazil. This centre alone would increase Brazil's steel production by about 70 percent over its current level. However, we expect that Brazil will be able to continue to expand its iron ore export capacity and retain its position in global trade. 

### Clearly, the medium-term future of iron ore is contingent on China's economic and industrial development. Variations in the very high growth that China is generating could cause significant divergences from the current forecast for global iron ore demand over the next five years - a period in which hundreds of millions of tonnes of new capacity is being brought on stream. Additionally, hiccups in the world economy - perhaps as a result of high energy prices - could negatively impact demand for steel and steel products, including China's manufactured goods exports. Potentially, the tightness in the iron ore market could quickly evaporate. However, just as iron ore industry consolidation has given the major producers the capability to accelerate their expansion plans, it also affords them the scope to defer or slow the rate of ramp-up of new projects and help maintain market stability.
- 19 Oct 2004



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Survey Pic ofthe Month 70 million tonnes in 2000 to 148 million tonnes in 2003. This year, China should import close to 200Mt, giving imports a share ofmore than 40 percent ofChina's total iron ore supply. However, Chinese domestic iron ore is generally low grade, and ifthis is taken into account, the imported ore share is closerto 60 percent on a contained iron basis. AME expects that total Asian iron ore consumption will growfrom 655Mt in 2003 to more than one billion tonnes by 2010, providing the primary boostforglobal iron ore trade. Meanwhile, the traditional major iron ore markets Europe and Japan will remain relatively flat, with incremental steel industry growth expected in South Korea and Taiwan. The trend in North America will also be flat, following the current period ofsteel industry restructuring and revival. In contrast, there is much interest in steel development projects in India and Brazil. These countries havethe potential to widen the range ofpossible future iron ore demand scenarios. 

### Global Iron Ore Consumption In India's case, there is a desire to match China, which became the first country to produce over200 million tonnes peryear of crude steel in 2003. India hopes to reach of60 million tonnes peryear by 2010, having produced 32 million tonne last year. This steel sector growth is stimulating India's iron ore industry, which burst onto the world scene in recent years as a major exporter. India became China's second-largest supplier (afterAustralia) in the first halfof2004. AME expects rising domestic demand to cap India's iron ore exports as the decade unfolds. Brazil's steel industry development is being supported and facilitated by its mining major CVRD, as itstrives to increase domestic consumption of its ore. Brazilian steelmakers currently aim to lift crude steel production by 10 million tonnes peryear by 2008. However, there are also many potential projects being considered there, involving some ofthe world's leading steel companies, including China's Baosteel, South Korea's Posco, and European giantArcelor. These could form part ofa 24 million tonnes peryear steel centre that CVRD recently proposed for Northern Brazil. This centre alone would increase Brazil's steel production by about 70 percent over its current level. However, we expect that Brazil will be able to continue to expand its iron ore export capacity and retain its position in global trade. Clearly, the medium-term future of iron ore is contingent on China's economic and industrial development. Variations in the very high growth that China is generating could cause significant divergences from the currentforecast for global iron ore demand overthe nextfive years - a period in which hundreds of millions oftonnes ofnew capacity is being brought on stream. Additionally, hiccups in the world economy - perhaps as a result of high energy prices

- could negatively impact demand for steel and steel products, including China's manufactured goods exports. Potentially, the tightness in the iron ore market could quickly evaporate. However,justas iron ore industry consolidation has given the major producers the capability to accelerate their expansion plans, it also affords them the scope to deferor slowthe rate of ramp-up ofnew projects and help maintain market stability.

- 19 Oct 2004

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