Last Update: 2005 May 10

IRON ORE INDUSTRY TRENDS AND ANALYSIS

World production of iron ore was at an all time high in 2004 at 1,203 million tonnes and crude steel production

increased to 1,055 million tonnes, 9% higher from a year earlier. The consistent debate that this growth is not an

indication of booming global demand, but of large growth in the Asia markets, particularly China appear has lost support

as demand remains strong throughout the majority of the markets in the world.

World Production of Iron Ore and Crude Steel 1994-2005 (Mt)

1400-

1200-

1000-

Mt 800

600

400

200-

0

1994 1996 1998 2000 2002 2004

Year

Steel Production Iron Ore Production

STEEL

Source: UNCTAD, IISI, Merrill Lynch, Deutsche Bank

Any analysis of the iron ore industry must include the industry's only customer - the world crude steel industry. The

steel industry has undergone rather dramatic changes in the 1990's that continue into the new millennium. Producers

have had to make decisions with increasing globalisation, falling prices, market distortions, reduction of trade barriers

and opening markets, rising protectionism, development of new technologies, changes in customers structures and the

continued problem of over-capacity.

Virtually all iron ore production is consumed by the steel industry. Although, world growth of iron ore and steel

generally expand and contract inline with world economic growth, a distinct pattern has emerged over the past ten years.

Growth in world iron ore production has averaged 1.8%, during which time western world exports have increased 3.4%.

This indicates a strong move towards quality as low quality production, particularly in former eastern block countries

have closed due to poor economics. In 2004, iron ore exports grew more than 12% to 650 million tonnes from 580

million tonnes in the previous year. Steel producers are demanding high quality iron ore products and rely on an

increasing export market to meet this demand. Exports are dominated by two countries; Brazil and Australia.

Globalisation is the most significant issue affecting the iron and steel industries and it has forced significant changes in

attitude. In the past, steel and iron ore were considered strategic industries. The growing international trade and

extensive merger and acquisition activity has seen takeovers and alliances that would have been unheard of just ten years

ago Most producers have had to jettison the emotional baggage that comes with the attitude that steel is a strategic core

 EE-RM/STD-00-550 COMMENT 86

i I 

Iron Mines Corporation Last Update: 2005 May 10 

IRON ORE INDUSTRY TRENDS AND ANALYSIS 

World production of iron ore was at an all time high in 2004 at 1,203 million tonnes and cmde steel production 

increased to 1,055 million tonnes, 9% higher from a year earlier. The consistent debate that this growth is not an 

indication of booming global demand, but oflarge growth in the Asia markets, particularly China appear has lost support 

as demand remains strong throughout the majority of the markets in the world. 

Mt 

World Production of Iron Ore and Crude Steel 1994-2005 (Mt) 

1400 

1200 

1 OOO+----------------..,--------:::~'------:;:-~ ~------------

600 - -~----- --------- -------~----~------~-- ------------------! 

400+---------------------------------

200 -1------------ ----~---~------- --------

o-·~--,---,----,---,--~----~--,---,---~---,---,--~ 

1994 1996 1998 

-.-Steel Production 

2000 

Year 

2002 

-lIlIII- Iron Ore Production 

2004 

Source: UNCTAD. IlSI, Merrill Lynch, Deutsche Bank 

STEEL 

Any analysis of the iron ore industry must include the industry's only customer - the world cmde steel industry. The 

steel industry has undergone rather dramatic changes in the 1990's that continue into the new millennium. Producers 

have had to make decisions with increasing globalisation, falling prices, market distortions, reduction of trade barriers 

and opening markets, rising protectionism, development of new technologies, changes in customers stmctures and the 

continued problem of over-capacity. 

Virtually all iron ore production is consumed by the steel industry. Although, world growth of iron ore and steel 

generally expand and contract inline with world economic growth, a distinct pattern has emerged over the past ten years. 

Growth in world iron ore production has averaged 1.8%, during which time western world exports have increased 3.4%. 

This indicates a strong move towards quality as low quality production, particularly in former eastern block countries 

have closed due to poor economics. In 2004, iron ore exports grew more than 12% to 650 million tonnes from 580 

million tonnes in the previous year. Steel producers are demanding high quality iron ore products and rely on an 

increasing export market to meet this demand. Exports are dominated by two countries; Brazil and Australia. 

Globalisation is the most significant issue affecting the iron and steel industries and it has forced significant changes in 

attitude. In the past, steel and iron ore were considered strategic industries. The growing international trade and 

extensive merger and acquisition activity has seen takeovers and alliances that would have been unheard of just ten years 

ago Most producers have had to jettison the emotional baggage that comes with the attitude that steel is a strategic core 
industry basic to the growth development of a country's wealth and power. Production of steel generally follows the

year to year change in world industrial production and demand, and expected growth rates. The world steel production

increase to 1,055 million tonnes in 2004 represents very strong demand in Asia as well as moderate to strong demand

elsewhere in the world.

Asian demand, particularly China, for steel products represented 41% (281.1 Mt) of world apparent steel consumption in

1998 and is expected to increase to 57% of apparent consumption (565 Mt) in 2005. Although steel is produced in

virtually every country, six countries or regions dominate and account for almost 80% of world crude steel production

and their imports dominate the seaborne trade of iron ore.

World Steel Production

Country/Region 2004 Crude Steel

Production (Mt)

% of World Total 2004 Seaborne Imports

of Iron Ore (Mt)

% of World Total

European Union - 25 193.3 18.4 175 29.6

USA 98.9 9.4 12 2.0

Japan 112.7 10.8 135 22.8

PR of China 272.5 25.9 208 35.1

S Korea 47.5 4.5 44 7.4

FSU (Russia et al) 111.8 10.6 11 1.8

Sub-total 836.7 79.7 571 96.6

World Total 1,055 100.0 591 100.0

Preliminary 2004 figures Source: IISI, Skillings, Roskill, Merrill Lynch

The top six form the primary and most important customers for the iron ore exporting nations. They account for 80% of

iron ore imports and, more importantly for Baffinland Iron Mines Corporation, more than 95% of the seaborne iron ore

demand. This consolidation has become even more focussed as three companies , Companhia Vale do Rio Doce SA

(CVRD), BHP Billiton Iron Ore (BHPBIO) and the Rio Tinto Hamersley Iron unit (RTHI) control directly 66% of the

seaborne trade . Nearly all iron ore is used to make steel , but not all steel is made from iron ore . Although the steel

industry is not noted for speed of change or innovation, there have been significant changes over the past twenty years.

Steel is produced via three processes.

The blast furnace remains the principal iron-making route while the basic oxygen furnace (BOF) remains the principal

steel-making method accounting for 60% of production. Open hearth furnaces, once the only method of steel making,

have been made virtually obsolete, driven out by environmental, operational and cost factors. They still account for 5%

of steel production, but it is expected that they will cease to exist by 2007. The electric arc furnace (EAF) steel making

process accounts for 35% of world steel production. It uses mostly scrap steel as feedstock. Increasingly, directly

reduced iron (DRI) or hot briquetted iron (HBI) has become an important feedstock for the EAF process.

The steel market has developed some unusual aspects over the past few years. Initially the Former Soviet Union was a

major supplier of quality scrap steel, depressing prices throughout the 1990's. However, its supplies of quality scrap

have been greatly reduced. It is important to realise that the EAF process does not improve the quality of steel

produced. The quality of the input steel is the same as quality of the output of the steel produced by the EAF method.

USA exports of scrap to China over the past two years, due to premium prices paid by Chinese steel mills, caused

regional shortages of scrap. Asia now produces 499 million tonnes or 47% of the world's steel production compared to

35% of world output in 1993. As stated above, China leads this growth and is the world's largest steel producer at 272

million tonnes of annual production, up 90 million tonnes from 2002 levels. This increase is twice the annual out put of

Germany, the world's fifth largest steel producing country. Analyst forecasts have China's steel production increasing

to 400 million tonnes by 2010 with world output increasing to 1,500 million tonnes over the same period. Despite large

planned increases in iron ore production by the CVRD, RTHI and BHPBIO, infrastructure capacity issues may impede

realisation of these increases.

2

 EE-RM/STD-00-550 COMMENT 86

i I 

Iron Mines Corporation 

industry basic to the growth development of a country's wealth and power. Production of steel generally follows the 

year to year change in world industrial production and demand, and expected growth rates. The world steel production 

increase to 1,055 million tonnes in 2004 represents very strong demand in Asia as well as moderate to strong demand 

elsewhere in the world. 

Asian demand, particularly China, for steel products represented 41 % (281.1 Mt) of world apparent steel consumption in 

1998 and is expected to increase to 57% of apparent consumption (565 Mt) in 2005. Although steel is produced in 

virtually every country, six countries or regions dominate and account for almost 80% of world crude steel production 

and their imports dominate the seaborue trade of iron ore. 

World Steel Production 

Country/Region 2004 Crude Steel % of World Total 2004 Seaborne Imports % of World Total 

Production (Mt) of Iron Ore (Mt) 

European Union - 25 193.3 18.4 175 29.6 

USA 98.9 9.4 12 2.0 

Japan 112.7 10.8 135 22.8 

PRof China 272.5 25.9 208 35.1 

S Korea 47.5 4.5 44 7.4 

FSU (Russia et al) 111.8 10.6 II 1.8 

Sub-total 836.7 79.7 571 96.6 

World Total 1,055 100.0 591 100.0 .. Prell1lllllUlY 2004 figures Source. lIS!, SkIllmgs, Rasklll, Mernll Lynch 

The top six form the primary and most important customers for the iron ore exporting nations. They account for 80% of 

iron ore imports and, more importantly for Baffinland Iron Mines Corporation, more than 95% of the seaborne iron ore 

demand. This consolidation has become even more focussed as three companies, Companhia Vale do Rio Doce SA 

(CVRD), BHP Billiton Iron Ore (BHPBIO) and the Rio Tinto Hamersley Iron unit (RTHI) control directly 66% of the 

seaborne trade. Nearly all iron ore is used to make steel, but not all steel is made from iron ore. Although the steel 

industry is not noted for speed of change or innovation, there have been significant changes over the past twenty years. 

Steel is produced via three processes. 

The blast furnace remains the principal iron-making route while the basic oxygen furnace (BOF) remains the principal 

steel-making method accounting for 60% of production. Open hearth furnaces, once the only method of steel making, 

have been made virtually obsolete, driven out by environmental, operational and cost factors. They still account for 5% 

of steel production, but it is expected that they will cease to exist by 2007. The electric arc furnace (EAF) steel making 

process accounts for 35% of world steel production. It uses mostly scrap steel as feedstock. Increasingly, directly 

reduced iron (DRI) or hot briquetted iron (HBI) has become an important feedstock for the EAF process. 

The steel market has developed some unusual aspects over the past few years. Initially the Former Soviet Union was a 

major supplier of quality scrap steel, depressing prices throughout the 1990's. However, its supplies of quality scrap 

have been greatly reduced. It is important to realise that the EAF process does not improve the quality of steel 

produced. The quality of the input steel is the same as quality of the output of the steel produced by the EAF method. 

USA exports of scrap to China over the past two years, due to premium prices paid by Chinese steel mills, caused 

regional shortages of scrap. Asia now produces 499 million tonnes or 47% of the world's steel production compared to 

35% of world output in 1993. As stated above, China leads this growth and is the world's largest steel producer at 272 

million tonnes of annual production, up 90 million tonnes from 2002 levels. This increase is twice the annual out put of 

Germany, the world's fifth largest steel producing country. Analyst forecasts have China's steel production increasing 

to 400 million tonnes by 2010 with world output increasing to 1,500 million tonnes over the same period. Despite large 

planned increases in iron ore production by the CVRD, RTHI and BHPBIO, infrastructure capacity issues may impede 

realisation of these increases. 

2 
The Steel Making Process

IRON ORE

F4aduoes mc1_:vr pigs fan from irarr oro.

Mnttsa. ft-

±L Y ,L,i]t`"`1-IIR1

Blast Fin- Pig Iron Casting

Source: IISI, Steel.org

World iron ore production totalled 1,203 million tonnes in 2004, up 10% from 2003 as iron ore companies stretched

production to meet demand. Although iron ore production is widely spread occurring in almost fifty countries, the bulk

of world production came from just five countries. The five largest producers Brazil, Australia, China, the former Soviet

Union and India account for more than 76% of the world total.

Production and exports of iron ore by principal countries, 2004

Production (Mt) % of total Exports (Mt) % exported % of total

Country

Brazil 220 22.6 205 93 32

Australia 231 19.4 222 96 32

China 147 note 1 11.3 0 n/a 0

Russia 95 8.4 18 19 3

India 110 9.7 67 61 9

Ukraine 66 5.8 19 29 3

USA 54 4.5 7 13 1

South Africa 40 3.5 28 70 4

Canada 31 3.0 17 55 5

Sweden 22 2.0 17 77 3

Sub-total 1016 84.5 600 59 93

World total 1203 650

Note I: Normalised to 65% Fe equivalent, actual output 262 Mt plus 50-60 Mt of estimated unofficial production; FSU exports are dominantly internal to CIS countries and former Eastern

block countries; India sold -30 Mt to China on a spot market basis in 2004 and in 2005 Q 1, an additional -30 Mt similar amount sold.

Preliminary 2004 figures Source: Mining Journal, UNCTAD, Roskill, Skillings

Iron ore producers historically fell into two basic categories, captive producers and exporters. Captive producers were

those owned by the steel companies and generally sold its production exclusively to owner-customer. Producers were

dominantly captive in the past, but this has and will continue to change. Steel producers may maintain a minority or

strategic interest in iron ore companies, but want flexibility of supply. Iron ore is predominantly sold via long-term

contracts that specify certain volumes that the steel producer must take. In both Asia and Europe, steel producers form

buying cartels. Prices are negotiated annually in so-called mating seasons.

3

 EE-RM/STD-00-550 COMMENT 86

i I 

Iron Mines Corporation 

The Steel Making Process 

PIg Iron Casting 

Source: lISI, SteeLorg 

IRON ORE 

World iron ore production totalled 1,203 million tonnes in 2004, up 10% from 2003 as iron ore companies stretched 

production to meet demand, Although iron ore production is widely spread occurring in almost fifty countries, the bulk 

of world production came from just five countries, The five largest producers Brazil, Australia, China, the former Soviet 

Union and India account for more than 76% of the world totaL 

Production and exports of iron ore by principal countries, 2004 

Production (Mt} % oftotal EXl10rts (Mt} % eXl10rted % of total 

Country 

Brazil 220 22.6 205 93 32 

Australia 231 19.4 222 96 32 

China 147 note 1 11.3 0 n/a 0 

Russia 95 8.4 18 19 3 

India 110 9.7 67 61 9 

Ukraine 66 5.8 19 29 3 

USA 54 4.5 7 13 

South Africa 40 3.5 28 70 4 

Canada 31 3.0 17 55 5 

Sweden 22 2.0 17 77 3 

Sub-total 1016 84.5 600 59 93 

World total 1203 650 Note 1. Nonllahsed to 65% Fe eqUIvalent, actual output 262 Mt plus 50~60 Mt of estimated unofficial productIOn, FSU exports are dommantly mternal to CIS countnes and famler Eastern 

block countries; India sold -30 Mt to China on a spot market basis in 2004 and in 2005 Q I, an additional-3D Mt similar amount sold. 

Preliminary 2004 figures Source: Mining Journal, UNCTAD, Roskill, Skillings 

Iron ore producers historically fell into two basic categories, captive producers and exporters. Captive producers were 

those owned by the steel companies and generally sold its production exclusively to owner-customer. Producers were 

dominantly captive in the past, but this has and will continue to change. Steel producers may maintain a minority or 

strategic interest in iron ore companies, but want flexibility of supply. Iron ore is predominantly sold via long-term 

contracts that specify certain volumes that the steel producer must take. In both Asia and Europe, steel producers form 

buying cartels. Prices are negotiated annually in so-called mating seasons. 

3 
The initial price settlement is very important as it traditionally sets the basis or benchmark for other company's

negotiations. In Asia, BHPBIO operations and RTHI are the traditional price setters, while CVRD sets the benchmark

for European sales. In the past, the first company to settle on price will gain volume at the expense of other producers.

More recently, CVRD has been the company setting benchmark prices in both hemispheres. There is considerable

animosity amongst both steel and iron ore producers about who settles on pricing and thereby sets the benchmark.

China has publicly complained that, as the largest importer of iron ore, it should be the trendsetter not Japan. In early

1999, BHPBIO and RTHI announced that they would jointly market their iron ore production. Although the attempt

failed due to disagreements over the value of each other's businesses, the effort did shock the Japanese Steel Mills

(JSM) buying cartel. One steel producer, NKK Corp., stated that CVRD is poised to displace RTIO and BHPBIO as the

price setters for the Japanese market. Further strong rhetoric between the JSM and BHPBIO/RTHI has led to the

following comments:

"...return to market fundamentals as the Asian crisis recedes or risk future reliability of supplies to your blast furnace.

(BHPBIO) The JSM countered by detailing the incremental improvement expected in steel output across the Japanese

industry and the Australian iron ore industry's dependence upon exports to Asia. "

Year to year prices can be variable and comparing prices can be complex. Prices are quoted in dry iron ore units (% Fe),

either dry long ton units (dltu) in Japan and dry metric tonne units (dmtu) in Europe. To add to the confusion, European

prices are quoted CIF, including customs/cost, insurance and freight to European ports, while Japan quotes prices are

FOB, free on board to the mine's terminal port. Penalties can be severe for high concentrations of deleterious elements

such as phosphorus, base metals, sulphur, alkalis, silica, alumina and titania oxide.

Markets for iron ore trade in the late 1990's were optimistic for the immediate future with seaborne iron ore shipments

increasing to 591 million tonnes in 2004. Total exports (includes non-seaborne trade) are estimated to be 650 million

tonnes. In 2003, slow growth in Asia and the general marginal profitability of the Japanese Steel Mills led many market

analysts to forecast a 3 to 5% decrease in iron ore prices in 2003. The actual price change was an increase of 9% in

sinter and lump prices and in 2004, prices increased by 18 to 22%. On February 22nd, the announced price increase for

iron ore sale products between CVRD and Nippon Steel was 71.5% for 2005. The increase is justified by a weakening

US dollar, extremely strong steel demand and corresponding strong demand for iron ore. Iron ore producers have noted

strong steel prices to justify both the iron price increase and the increase in coking coal prices by an average 120% in

2005. Despite strong steel prices, the steel mills state that steel prices have only increased to 1980 price levels and note

that prices during the period 1990-2003 were artificially low.

BHPBIO and RTHI commented that the large price increases will not attract significant new entrants to the iron ore

industry. They argue that development of a quality iron ore deposit and entry into the market is a difficult task due to

the inherent barriers associated with finding and developing a quality iron ore deposit. The comment that not all iron ore

deposits are equal and the importance of developing a quality sale product is not very well understood by the non-iron

ore industry. More recently, the price increase for Carajas pellets was 86.67% and Carajas lump into Europe was 79%.

This increase in the price of lump has allowed Carajas lump to pass the Brockman lump in price per Fe unit. Previously,

Carajas was discounted to the Australian lump due to excessive fines (-6.3 mm) generation.

The price increase and growth in the iron ore industry has been fuelled by China's voracious consumption of all raw

materials. China's demand for iron ore has been consistently underestimated throughout the past ten years. China

Economic Net reports that iron ore prices for iron ore imported from India on a spot market basis has dropped sharply

from US$ 97 per tonne to US$ 85 per tonne for sinter feed purportedly representing a weakening in the market. This per

tonne price compares to some US$ 37 per tonne of sinter feed even with the 2005 price increase. Extracting shipping

costs, China was buying iron ore at two to three times the price steel makers with long-term contracts were paying in

2004. Prices have dropped but a premium of more than 50% over the 2005 price remains for spot sales. Shortages of

raw material for the blast furnace has had some steel producers buying `iron credits' with little or no regard to

deleterious elements or quality. This allowed unofficial or illegal producers to profit in the market. Most of the massive

growth in India exports has been spot sales to China and much has been from production that is of questionable

sustainability. Specifications of sale were limited to a minimum iron content of 63.5% Fe. This will change in the

future as China will move to quality iron ores and much of India's export will disappear from the market.

4

 EE-RM/STD-00-550 COMMENT 86

i I 

Corporation 

The initial price settlement is very important as it traditionally sets the basis or benchmark for other company's 

negotiations. In Asia, BHPBIO operations and RTHI are the traditional price setters, while CVRD sets the benchmark 

for European sales. In the past, the first company to settle on price will gain volume at the expense of other producers. 

More recently, CVRD has been the company setting benchmark prices in both hemispheres. There is considerable 

animosity amongst both steel and iron ore producers about who settles on pricing and thereby sets the benchmark. 

China has publicly complained that, as the largest importer of iron ore, it should be the trendsetter not Japan. In early 

1999, BHPBIO and RTHI announced that they would jointly market their iron ore production. Although the attempt 

failed due to disagreements over the value of each other's businesses, the effort did shock the Japanese Steel Mills 

(JSM) buying cartel. One steel producer, NKK Corp., stated that CVRD is poised to displace RTIO and BHPBIO as the 

price setters for the Japanese market. Further strong rhetoric between the JSM and BHPBIO/RTHI has led to the 

following comments: 

" ... return to marketfitndamentals as the Asian crisis recedes or riskfitture reliability of supplies to your blastfitrnace. 

(BHPBIO) The JSM countered by detailing the incremental improvement expected in steel output across the Japanese 

industlY and the Australian iron ore industlY's dependence upon exports to Asia. " 

Year to year prices can be variable and comparing prices can be complex. Prices are quoted in dry iron ore units (% Fe), 

either dry long ton units (dltu) in Japan and dry metric tonne units (dmtu) in Europe. To add to the confusion, European 

prices are quoted CIF, including customs/cost, insurance and freight to European ports, while Japan quotes prices are 

FOB, free on board to the mine's terminal port. Penalties can be severe for high concentrations of deleterious elements 

such as phosphorus, base metals, sulphur, alkalis, silica, alumina and titania oxide. 

Markets for iron ore trade in the late 1990's were optimistic for the immediate future with seaborne iron ore shipments 

increasing to 591 million tonnes in 2004. Total exports (includes non-seaborne trade) are estimated to be 650 million 

tonnes. In 2003, slow growth in Asia and the general marginal profitability of the Japanese Steel Mills led many market 

analysts to forecast a 3 to 5% decrease in iron ore prices in 2003. The actual price change was an increase of 9% in 

sinter and lump prices and in 2004, prices increased by 18 to 22%. On February 22nd, the announced price increase for 

iron ore sale products between CVRD and Nippon Steel was 71.5% for 2005. The increase is justified by a weakening 

US dollar, extremely strong steel demand and corresponding strong demand for iron ore. Iron ore producers have noted 

strong steel prices to justify both the iron price increase and the increase in coking coal prices by an average 120% in 

2005. Despite strong steel prices, the steel mills state that steel prices have only increased to 1980 price levels and note 

that prices during the period 1990-2003 were artificially low. 

BHPBIO and RTHI commented that the large price increases will not attract significant new entrants to the iron ore 

industry. They argue that development of a quality iron ore deposit and entry into the market is a difficult task due to 

the inherent barriers associated with finding and developing a quality iron ore deposit. The comment that not all iron ore 

deposits are equal and the importance of developing a quality sale product is not very well understood by the non-iron 

ore industry. More recently, the price increase for Carajas pellets was 86.67% and Carajas lump into Europe was 79%. 

This increase in the price oflump has allowed Carajas lump to pass the Brockman lump in price per Fe unit. Previously, 

Carajas was discounted to the Australian lump due to excessive fines (-6.3 mm) generation. 

The price increase and growth in the iron ore industry has been fuelled by China's voracious consumption of all raw 

materials. China's demand for iron ore has been consistently underestimated throughout the past ten years. China 

Economic Net reports that iron ore prices for iron ore imported from India on a spot market basis has dropped sharply 

from US$ 97 per tonne to US$ 85 per tonne for sinter feed purportedly representing a weakening in the market. This per 

tonne price compares to some US$ 37 per tonne of sinter feed even with the 2005 price increase. Extracting shipping 

costs, China was buying iron ore at two to three times the price steel makers with long-term contracts were paying in 

2004. Prices have dropped but a premium of more than 50% over the 2005 price remains for spot sales. Shortages of 

raw material for the blast furnace has had some steel producers buying 'iron credits' with little or no regard to 

deleterious elements or quality. This allowed unofficial or illegal producers to profit in the market. Most of the massive 

growth in India exports has been spot sales to China and much has been from production that is of questionable 

sustainability. Specifications of sale were limited to a minimum iron content of 63.5% Fe. This will change in the 

future as China will move to quality iron ores and much oflndia's export will disappear from the market. 

4 
Iron N/1irlos CcrpcretLon

MiningNews.net reports estimates over the past few years by market analysts for Chinese iron ore imports have been

increasing from an expected importation of 250 million tonnes of iron ore by 2015 to almost 500 million tonnes by the

same year. This amounts to the entire world's iron ore export market for 2002. Merrill Lynch has China's expected

consumption of iron ore increasing to more than 800 million tonnes by 2009 and import requirements increasing to 427

million tonnes over the same period. Massive increases in iron ore consumption in China and Asia as a whole have

overshadowed moderate to strong growth in consumption of iron ore elsewhere in the world.

World Iron Ore Imports by Principal Destination, 1990-2004 (Mt)

250

Mt

200 -

150 -I

100 -

50 d

1990 1992 1994 1996 1998

Year

2000 2002 2004e

Europe (15)

Japan

China

Other

Source: UNCTAD, Deutsche Bank, Merrill Lynch

Competition amongst iron ore producers is fierce. In the past, buying cartels have kept prices low by playing on the

competitive and antagonistic behaviour of producers. Shipping rates in the fifteen year period from 1983-1998 steadily

decreased. In 1998, ocean freight rates fell quite dramatically, which reduced the cost advantage that the Australian

producers held in the Asian markets. This allowed Brazil's CVRD to make significant market penetration into the Asian

markets. Shipping rates have increased due to the increase in oil prices and tight capacity for bulk carriers, but the

markets have changed and long-term contract shipping rates appear to have levelled the playing field for producers.

5

 EE-RM/STD-00-550 COMMENT 86

i I 

Iron Mines Corporation 

MiningNews.net reports estimates over the past few years by market analysts for Chinese iron ore imports have been 

increasing from an expected importation of 250 million tonnes of iron ore by 2015 to almost 500 million tonnes by the 

same year. This amounts to the entire world's iron ore export market for 2002. Merrill Lynch has China's expected 

consumption of iron ore increasing to more than 800 million tonnes by 2009 and import requirements increasing to 427 

million tonnes over the same period. Massive increases in iron ore consumption in China and Asia as a whole have 

overshadowed moderate to strong growth in consumption of iron ore elsewhere in the world. 

Mt 

World Iron Ore Imports by Principal Destination, 1990-2004 (Mt) 

250 

200 -

150 

100 -

50 

0-

1990 1992 1994 1996 1998 2000 

Year 

2002 2004e 

-+- Europe (15) 

-.ir-Japan 

_China 

Other 

Sourcc: UNCTAD, Deutschc Bank, Merrill Lynch 

Competition amongst iron ore producers is fierce. In the past, buying cartels have kept prices low by playing on the 

competitive and antagonistic behaviour of producers. Shipping rates in the fifteen year period from 1983-1998 steadily 

decreased. In 1998, ocean freight rates fell quite dramatically, which reduced the cost advantage that the Australian 

producers held in the Asian markets. This allowed Brazil's CVRD to make significant market penetration into the Asian 

markets. Shipping rates have increased due to the increase in oil prices and tight capacity for bulk carriers, but the 

markets have changed and long-term contract shipping rates appear to have levelled the playing field for producers. 

5 
Iron [`./lir S 7or pnnrn1lon

Representative Spot Iron Ore Freight Rates, 1993 to 2004 ($/t)

W.Africa2- Brazil- Canada- Australia- Norway- Brazil- AustraliaContinent Continent Continent Continent Continent China/Japan Japan

1993 3.6 5.6 5.2 7.4 2.9 9.2 ...

1994 4.1 6.4 6.3 9.0 3.2 10.3 ...

1995 5.4 7.6 7.2 9.9 3.9 13.5 ...

1996 4.2 5.6 5.3 7.0 3.0 9.1 4.4

1997 4.2 6.2 5.5 7.5 3.2 10.7 5.0

1998 2.8 4.5 4.0 6.0 2.4 6.5 3.7

1999 ... 4.7 4.0 6.7 2.5 6.9 3.7

2000 ... 7.5 6.2 10.9 3.5 11.7 6.3

2001 ... 5.4 4.6 7.8 2.5 8.4 4.3

2002 ... 5.4 4.4 7.0 2.5 8.7 4.1

2003 ... 8.3 6.6 10.7 3.5 14.1 6.8

2004 ... 19.7 ... 21.1 6.8 33.1 15.6

2005 e ...

17.5 gore 2 12.1 -1 2

... 6.9 note 2

... ...

Note 2: proposed long-term contract rate includes unloading at terminalport ($1.75/1) Source: Drewry Shipping Consultants, SSY

Short-term freight rates have increased two and three-fold due to the attempt to meet China's demand. Individual spot

prices have seen rates for India-China exceeding $60 per tonne, while Brazil-China have reportedly exceeded $80 per

tonne. Steel mills, short of iron ore product, have reportedly paid as much as $160 per tonne for a shipment of much

needed iron ore. It is important to realise that the great majority of shipping rates for all bulk commodities are

negotiated through long-term contracts. These rates fix an exporters and importers cost over a period of time, on

average ten years. The prices have an inflator for fuel increases based upon an agreed formula. However, producers or

consumers that underestimate or do not cover their contract positions have been forced to access the spot market to meet

obligations. In many instances, the freight rate was more than the value of the cargo. Port and handling capacity at

many of Asia's ports have been severely stretched and it is reported that ships have waited several weeks to unload their

cargo.

Slightly lower shipping rates for iron products are expected in the near future and long-term rates should be similar to

those reported for 2005. However, safety and environmental legislation in Europe will force all shipping companies to

use double-hulled bulk carriers by 2012. Tankers must meet this requirement earlier. Similar legislation has been tabled

in Japan and the USA, despite fierce lobbying by ship owners. Rates will have to rise to allow companies to repay

significant capital outlays for new safer double-hulled fleets. This will be offset by cost savings on insurance premiums

that have risen dramatically in the 1990's to accommodate past ship wreaks and oil spills. These `preventable' accidents

have lead to increased demand for safer and better quality ships. Additional cost savings will also be realised due to

more efficient designs and faster loading and unloading times.

Customers and producers will focus on price, quality, reliability of supply and transportation during contract

negotiations. The exploitation of a quality resource, such as the Brockman lump iron ore (the primary source of lump

for BHPBIO and RTHI), has made RTHI the most profitable unit in the Rio Tinto Group over the past twenty years.

The Rio Tinto Group strategy is to differentiate itself as a low cost leader in mineral production. It does this by focusing

on its core competence, large-scale low-cost open cast mining of superior resources. It is these resources that allow the

Group to succeed at this strategy. The quality lump deposits have allowed the Group to differentiate itself in the iron ore

industry as the lowest cost producer. Initial production in Australia started in 1966 at 5 million tonnes per year. In

2003, RTHI shipped 72.8 million tonnes of iron ore and has increased its Pilbara operations nominal capacity to 74

million tonnes per annum. Major capital expenditures were recently announced to increase this capacity by 50% to

accommodate Asian demand. RTHI also sold 58.4 million tonnes through its Robe River Mining and Iron Ore

Company of Canada operations.

Over the last few years, two of the dominant iron ore exporter-producers have purchased competitors to strengthen their

position in their home market. Rio Tinto bought North Limited, which controls the Robe River and IOC operations. In

Brazil, CVRD bought control of Ferteco, Samitri and Samarco, adding some 35 million tonnes of production to its

already massive production levels. This consolidation of production and the failed attempt of RTHI and BHPBIO to

6

 EE-RM/STD-00-550 COMMENT 86

i I 

iron Mines Corporation 

Representative Spot Iron Ore Freight Rates, 1993 to 2004 ($/t) 

W.Africa'- Brazil- Canada- Australia- Norwav- Brazil- AustraliaContinent Continent Continent Continent Continent China/Ja[!an Ja[!an 

1993 3.6 5.6 5.2 7.4 2.9 9.2 

1994 4.1 6.4 6.3 9.0 3.2 10.3 

1995 5.4 7.6 7.2 9.9 3.9 13.5 

1996 4.2 5.6 5.3 7.0 3.0 9.1 4.4 

1997 4.2 6.2 5.5 7.5 3.2 10.7 5.0 

1998 2.8 4.5 4.0 6.0 2.4 6.5 3.7 

1999 4.7 4.0 6.7 2.5 6.9 3.7 

2000 7.5 6.2 10.9 3.5 11.7 6.3 

2001 5.4 4.6 7.8 2.5 8.4 4.3 

2002 5.4 4.4 7.0 2.5 8.7 4.1 

2003 8.3 6.6 10.7 3.5 14.1 6.8 

2004 19.7 21.1 6.8 33.1 15.6 

2005 e 17.5 flore2 12.1 note2 6.911ote2 

Note 2: proposed long-term contract rate inc/lldes IInloading at terminal port (-$1. 751t) Source: Drewry Shipping Consultants, SSY 

Short-term freight rates have increased two and three-fold due to the attempt to meet China's demand. Individual spot 

prices have seen rates for India-China exceeding $60 per tonne, while Brazil-China have reportedly exceeded $80 per 

tonne. Steel mills, short of iron ore product, have reportedly paid as much as $160 per tonne for a shipment of much 

needed iron ore. It is important to realise that the great majority of shipping rates for all bulk commodities are 

negotiated through long-term contracts. These rates fix an exporters and importers cost over a period of time, on 

average ten years. The prices have an inflator for filel increases based upon an agreed formula. However, producers or 

consumers that underestimate or do not cover their contract positions have been forced to access the spot market to meet 

obligations. In many instances, the freight rate was more than the value of the cargo. Port and handling capacity at 

many of Asia's ports have been severely stretched and it is reported that ships have waited several weeks to unload their 

cargo. 

Slightly lower shipping rates for iron products are expected in the near future and long-term rates should be similar to 

those reported for 2005. However, safety and environmental legislation in Europe will force all shipping companies to 

use double-hulled bulk carriers by 2012. Tankers must meet this requirement earlier. Similar legislation has been tabled 

in Japan and the USA, despite fierce lobbying by ship owners. Rates will have to rise to allow companies to repay 

significant capital outlays for new safer double-hulled fleets. This will be offset by cost savings on insurance premiums 

that have risen dramatically in the 1990's to accommodate past ship wreaks and oil spills. These 'preventable' accidents 

have lead to increased demand for safer and better quality ships. Additional cost savings will also be realised due to 

more efficient designs and faster loading and unloading times. 

Customers and producers will focus on price, quality, reliability of supply and transportation during contract 

negotiations. The exploitation of a quality resource, such as the Brockman lump iron ore (the primary source of lump 

for BHPBIO and RTHI), has made RTHI the most profitable unit in the Rio Tinto Group over the past twenty years. 

The Rio Tinto Group strategy is to differentiate itself as a low cost leader in mineral production. It does this by focusing 

on its core competence, large-scale low-cost open cast mining of superior resources. It is these resources that allow the 

Group to succeed at this strategy. The quality lump deposits have allowed the Group to differentiate itself in the iron ore 

industry as the lowest cost producer. Initial production in Australia started in 1966 at 5 million tonnes per year. In 

2003, RTHI shipped 72.8 million tonnes of iron ore and has increased its Pilbara operations nominal capacity to 74 

million tonnes per annum. Major capital expenditures were recently announced to increase this capacity by 50% to 

accommodate Asian demand. RTHI also sold 58.4 million tonnes through its Robe River Mining and Iron Ore 

Company of Canada operations. 

Over the last few years, two of the dominant iron ore exporter-producers have purchased competitors to strengthen their 

position in their home market. Rio Tinto bought North Limited, which controls the Robe River and IOC operations. In 

Brazil, CVRD bought control of Ferteco, Samitri and Samarco, adding some 35 million tonnes of production to its 

already massive production levels. This consolidation of production and the failed attempt of RTHI and BHPBIO to 

6 
jointly market their ores have created a level of concern amongst steel producers and new opportunities for a new

operation with a quality product.

Currently CVRD, BHPBIO and RTHI have expansion plans to increase iron ore output significantly. By the end of the

decade, RTHI plans to increase output by 54 million tonnes, BHPBIO by 80 million tonnes and CVRD by 101 million

tonnes. In the cases of BHPBIO and RTHI, infrastructure is at capacity and to meet these planned expansions will

require new rail and port capacity. The increases would add to the big threes already dominate market position.

Currently they control more than 66% of the seaborne trade in iron ore, a 4% drop from 2003. Including all reported

planned projects; output is expected to increase 508 million tonnes by the end of the decade.

Despite the increased output, demand and supply is expected to remain closely aligned. The major iron ore producers

will avoid a market over supply. CVRD and BHP Billiton have actually stated that they would be willing to produce

below their full capacity utilization rates in order to maintain a balanced market in case there is a significant drop in

demand. Despite these statements, there are several companies seeking to develop on-the-shelf resources. Profitable

development and expansion of these projects will be dependent upon the quality of the resource potential.

Over the past two decades, steel mills have focused their purchases on iron ore products with specific characteristics to

maximise productivity in the blast furnace. The strength of the buyer (steel mills) allowed them to force the iron ore

companies to develop a better quality product with low deleterious elements and specific metallurgical properties. More

recently, the iron ore producers, primarily the big three, have limited their sale products to several standardised products.

Output from a specific mine is limited and considerable blending occurs. Quality remains consistent, however the shift

in power has moved to the sellers (iron ore producers). China is less concerned with quality presently, however this will

change in the very near future. The move towards quality iron ore products remains a constant in the future. This bodes

well for Baffinland as a high grade lump and sinter product will be well received by the steel producers, particularly

European steel mills.

Primary Competitors in the USA and European Markets

Company Location 2004 Shipments (Mt) Product Primary Customer

CVRD

North System Brazil 227.5 Fines, Pellets, Lump Europe, Asia, USA

South System Brazil Fines, Pellets

MBR Brazil Fines, Pellets

Samarco Brazil Fines, Pellets

Quebec Cartier Canada Pellets, Fines

Rio Tinto

Hamersley Iron Australia 107.8 Fines, Lump Asia, Europe

Robe River Australia Fines, Lump Asia, Europe

Iron Ore Company Canada Pellets, Fines USA, Europe

BHP Billiton Iron Ore

Australia 95.9 Fines Lump Asia, Europe

Samarco Brazil Fines

LKAB Sweden 22.3 Fines, Pellets, Lump Europe

SNIM Mauritania 9.8 Fines, Pellets Europe, Asia

CVG Venezuela 22.4 Fines, Pellets Europe, Local

Kumba South Africa 30.1 Lump, Fines Asia, Europe

Note: shipments include non-seaborne iron ore trade Source: Annual Reports, Skillings

India has increased iron ore exports at the expense of domestic sales and in its haste to meet China's demand has left

some domestic steel producers short of product. In addition, a considerable portion of the production increase has been

of questionable quality and sustainability. Government pressure to mitigate the damage caused to local steel mills will

see iron export growth curtailed and CVRD, RTHI and BHPBIO control of the seaborne trade should return to 70+%

market share over the next few years.

7

 EE-RM/STD-00-550 COMMENT 86

i I 

Iron Mines Corporation 

jointly market their ores have created a level of concern amongst steel producers and new opportunities for a new 

operation with a quality product. 

Currently CVRD, BHPBIO and RTHI have expansion plans to increase iron ore output significantly. By the end of the 

decade, RTHI plans to increase output by 54 million tonnes, BHPBIO by 80 million tonnes and CVRD by 101 million 

tonnes. In the cases of BHPBIO and RTHI, infrastructure is at capacity and to meet these planned expansions will 

require new rail and port capacity. The increases would add to the big threes already dominate market position. 

Currently they control more than 66% of the seaborne trade in iron ore, a 4% drop from 2003. Including all reported 

planned projects; output is expected to increase 508 million tonnes by the end of the decade. 

Despite the increased output, demand and supply is expected to remain closely aligned. The major iron ore producers 

will avoid a market over supply. CVRD and BHP Billiton have actually stated that they would be willing to produce 

below their full capacity utilization rates in order to maintain a balanced market in case there is a significant drop in 

demand. Despite these statements, there are several companies seeking to develop on-the-shelf resources. Profitable 

development and expansion of these projects will be dependent upon the quality of the resource potential. 

Over the past two decades, steel mills have focused their purchases on iron ore products with specific characteristics to 

maximise productivity in the blast furnace. The strength of the buyer (steel mills) allowed them to force the iron ore 

companies to develop a better quality product with low deleterious elements and specific metallurgical properties. More 

recently, the iron ore producers, primarily the big three, have limited their sale products to several standardised products. 

Output from a specific mine is limited and considerable blending occurs. Quality remains consistent, however the shift 

in power has moved to the sellers (iron ore producers). China is less concerned with quality presently, however this will 

change in the very near future. The move towards quality iron ore products remains a constant in the future. This bodes 

well for Baffinland as a high grade lump and sinter product will be well received by the steel producers, particularly 

European steel mills. 

Primary Competitors in the USA and European Markets 

Company Location 2004 Shipments (Mt) Product Primary Customer 

CVRD 

North System Brazil 227.5 Fines, Pellets, Lump Europe, Asia, USA 

South System Brazil Fines, Pellets 

MBR Brazil Fines, Pellets 

Samarco Brazil Fines, Pellets 

Quebec Cartier Canada Pellets, Fines 

Rio Tinto 

Hamersley Iron Australia 107.8 Fines, Lump Asia, Europe 

Robe River Australia Fines, Lump Asia, Europe 

Iron Ore Company Canada Pellets, Fines USA, Europe 

BHP Billiton Iron Ore 

Australia 95.9 Fines Lump Asia, Europe 

Samarco Brazil Fines 

LKAB Sweden 22.3 Fines, Pellets, Lump Europe 

SNIM Mauritania 9.8 Fines, Pellets Europe, Asia 

CVG Venezuela 22.4 Fines, Pellets Europe, Local 

Kumba South Africa 30.1 Lump, Fines Asia, Europe 

Note. shIpments mcludc non-seaborne IroTI ore trade Source. Annual Reports, Skllhngs 

India has increased iron ore exports at the expense of domestic sales and in its haste to meet China's demand has left 

some domestic steel producers short of product. In addition, a considerable portion of the production increase has been 

of questionable quality and sustainability. Government pressure to mitigate the damage caused to local steel mills will 

see iron export growth curtailed and CVRD, RTHI and BHPBIO control of the seaborne trade should return to 70+% 

market share over the next few years. 

7 
Corporate Control of Iron Ore Production and Exports, 2004 (% of world total)

Production Trade

CVRD 14 32

Rio Tinto 8 19

BHP Billiton 7 15

Total 29 66

Source: UNCTAD

Iron ore prices are set each year in complex negotiations by RTHI, BHPBIO or CVRD . These prices form the basis for

prices received by other producers, based upon deleterious elements, degradation index (fine generation during

handling), and how the ore behaves in the blast furnace . Each producer's price is based upon these benchmark prices.

Prices - European Bench Mark 1998 1999 2000 2001 2002 2003 2004 2005

CVRD Itabira Fines (US¢/dmtu- FOB) 29.7 27.0 28.1 29.3 29.1 31.71 37.63 64.54

CVRD Carajas Fines US¢/dmtu-FOB) 31.0 27.6 28.8 30.1 29.3 31.94 37.90 65.00

CVRDItabira/Cara'asPellets (US¢/dtntu-FOB) 53.6 46.5 49.9 52.4 50.4 54.93 63.60 118.57

Prices - Japanese Bench Mark

Mt Newman/Hamersle Lump US¢/dltu - FOB) 38.8 34.83 36.84 38.03 36.13 39.35 46.67 80.04

Mt Newman/Hamersle Fines US¢/dltu - FOB)_ 1 29.9 26.63 27.79 28.98 28.28 30.83 36.67 62.89

Source: IISI, Skillings, Roskill

To add to the confusion, European prices are often quoted CIF, including customs/cost, insurance and freight to

European ports, while Japan prices are quoted FOB, free on board to the mine's terminal port. Penalties can be severe

for high concentrations of deleterious elements such as phosphorus, base metals, sulphur, alkalis, silica, alumina and

titania oxide or for failing to meet physical specifications such as percentage of fines or ultrafines.

The dmtu is ten kilograms (10 kg) of iron ore based upon a 1% Fe content. Calculating a price per tonne of shipped

product can be confusing and comparison of iron ore sold on a per tonne basis requires significant assumptions to be

made. Mt Newman lump grading 63% Fe with a 3% moisture content would sell for:

63% Fe times $0.8004 times 0.97 = $48. 91 per long ton or $48.14 per tonne

In comparison, a Carajas pellet with 66% Fe and 2% moisture would sell for:

66% Fe times $1.1857 times 0.98 = $77.92 per long ton or $76.69 per tonne

This calculation assumes that the ore shipment meets normal negotiated contract specifications. Some of these

specifications were for product standards set several years ago and some shipments incur penalties. Many steel mills

accept certain deleterious elements to acquire a specific property in a iron ore product. The steel mills want consistency

and predictability in iron ore products for their blast furnaces.

Iron ore production is in three forms; pellets, lump and fines for sinter feed. Fines (-6.3mm) are used as sinter feed the

most common burden for blast furnaces. Sinter is friable and cannot be transported far thus sinter plants are close to

steel mills. Pellets are highly variable in their specific content, as individual steel mills will request the specific

characteristics and composition required. Many mining operations have pelletising plants at the mine site or near its

terminal port. Japanese steel mills have pelletising plants on-site, but will import pellets with very specific composition.

There is no shortage of pelletising capacity worldwide. A number of plants have been mothballed and with increased

demand may come back on-stream. Future demand for pellets is expected to be relatively flat with most of new future

demand for fines and lump. The bench mark prices for lump have been historically set by RTHI or BHPBIO with the

benchmark price for the Brockman lump being identical for both companies.

Iron Ore Price Bench Mark Com parison

8

 EE-RM/STD-00-550 COMMENT 86

i I 

Iron Mines Corporation 

Corporate Control ofIron Ore Production and Exports, 2004 (% of world total) 

Production Trade 

CVRD 14 32 

Rio Tinto 8 19 

BRP Billiton 7 15 

Total 29 66 

Source: UNCTAD 

Iron ore prices are set each year in complex negotiations by RTHI, BHPBIO or CVRD. These prices form the basis for 

prices received by other producers, based upon deleterious elements, degradation index (fine generation during 

handling), and how the ore behaves in the blast furnace. Each producer's price is based upon these benchmark prices. 

ron o re P' nce B enc hM ar kC ompanson 

Prices - European Bench Mark 1998 1999 2000 2001 2002 2003 2004 2005 

CVRD ltabira Fines (US¢/dmtu - FOB) 29.7 27.0 28.1 29.3 29.1 31.71 37.63 64.54 

CVRD Carajas Fines (US¢/dmtu - FOB) 31.0 27.6 28.8 30.1 29.3 31.94 37.90 65.00 

CVRD ltabira/Carajas Pellets (US¢/dmtu - FOB) 53.6 46.5 49.9 52.4 50.4 54.93 63.60 118.57 

Prices - Japanese Bench Mark 

Mt NewmaniHamersley Lump US¢/dltu - FOB) 38.8 34.83 36.84 38.03 36.13 39.35 46.67 80.04 

Mt NewmaniHamersley Fines US¢/dltu - FOB) 29.9 26.63 27.79 28.98 28.28 30.83 36.67 62.89 

Source: lIS!, SkIllings, Rosklll 

To add to the confusion, European prices are often quoted CIF, including customs/cost, insurance and freight to 

European ports, while Japan prices are quoted FOB, free on board to the mine's terminal port. Penalties can be severe 

for high concentrations of deleterious elements such as phosphorus, base metals, sulphur, alkalis, silica, alumina and 

titania oxide or for failing to meet physical specifications such as percentage of fines or ultrafines. 

The dmtu is ten kilograms (10 kg) of iron ore based upon a 1 % Fe content. Calculating a price per tonne of shipped 

product can be confusing and comparison of iron ore sold on a per tonne basis requires significant assumptions to be 

made. Mt Newman lump grading 63% Fe with a 3% moisture content would sell for: 

63% Fe times $0.8004 times 0.97 = $48.91 per long ton or $48.14 per tonne 

In comparison, a Carajas pellet with 66% Fe and 2% moisture would sell for: 

66% Fe times $1.1857 times 0.98 = $77.92 per long ton or $76.69 per tonne 

This calculation assumes that the ore shipment meets normal negotiated contract specifications. Some of these 

specifications were for product standards set several years ago and some shipments incur penalties. Many steel mills 

accept certain deleterious elements to acquire a specific property in a iron ore product. The steel mills want consistency 

and predictability in iron ore products for their blast furnaces. 

Iron ore production is in three forms; pellets, lump and fines for sinter feed. Fines (-6.3mm) are used as sinter feed the 

most common burden for blast furnaces. Sinter is friable and cannot be transported far thus sinter plants are close to 

steel mills. Pellets are highly variable in their specific content, as individual steel mills will request the specific 

characteristics and composition required. Many mining operations have pelletising plants at the mine site or near its 

terminal port. Japanese steel mills have pelletising plants on-site, but will import pellets with very specific composition. 

There is no shortage of pelletising capacity worldwide. A number of plants have been mothballed and with increased 

demand may come back on-stream. Fuhlre demand for pellets is expected to be relatively flat with most of new future 

demand for fines and lump. The bench mark prices for lump have been historically set by RTHI or BHPBIO with the 

benchmark price for the Brockman lump being identical for both companies. 

8 
Benchmark Lump_Sinter Prices Australia-Japan

90.00 -

80.00

70.00

60.00

50.00

40.00 -

30.00 -

20.00

10.00

0.00

0Q O'\ Oq' 00 Ot' Pb 00 OA 02 00 0c O Oq 00 OEx Oh

'C' NO' Ni NC NC N Nc NO N( ') 0

Year

sinter feed

lump

Lump, simply defined, is naturally occurring `pellets' requiring simple crushing and screening before shipment. It must

meet strict minimum chemical characteristics, generally 62+% Fe, as it is not processed and forms a direct charge to the

blast furnace. More importantly it must meet specific physical characteristics. Once crushed to -31.5mm+6.3mm (-1'/4

inch +1/4 inch) in size, it must not degradate during handling. It is easier to handle, does not roll around in the furnace, as

do pellets and is less polluting than fines or concentrate (dust) and easier to handle during transport. It commands a

premium to fines (-6.3mm) and does not require the grinding and processing to form pellets. All blast furnaces use a

variable combination of sinter, lump and/or pellets as input or direct charge. Individual blast furnaces are extremely

variable in their direct charge composition. Generally, the US steel producers use 75+% pellets in their blast furnaces

whiles the rest of the world uses sinter feed (60+%) as a dominant burden charge. The majority of blast furnaces

increasingly blend and mix the types of ores used as direct charge to reduce swelling, increase throughput, reduce energy

cost, reduce coke consumption and generally improve the steel making process while reducing pollution and

environmental concerns. Although, specific charge mixes can vary dramatically, the average blast furnace mix is

estimated as follows:

Region Lump Pellets Sinter

USA 3% 75% 22%

Europe 14% 17% 69%

Japan 19% 16% 65%

Source: Ullmans

Importantly lump has a significant price advantage over pellets, being 50+% cheaper. It can be stockpiled and used as

direct charge to increase output when demand is high. Pellets will breakdown if stored for lengthy periods. Sinter and

pellet plants cannot incrementally increase production without significant capital outlays. Despite this advantage, there

are strong views amongst the world's steel mills on cost and productivity advantages of the various blast furnace

charges.

There is an increasing demand for a new quality lump ore supply. Two of the main sources, the BHPBIO and RTHI's

Brockman lump ores in the Pilbara of northwest Australia are being depleted. As mining depths increase, the ores are

becoming softer and moisture content increases. Output is shifting to the Marra Mamba lump ores, but they are softer,

have a lower lump content, are lower grade and contain approximately 10% moisture. This translates to an approximate

Average Charge Mix in the Blast Furnace (1990's)

9

 EE-RM/STD-00-550 COMMENT 86

i I 

Iron Mines Corporation 

Benchmark Lump_Sinter Prices Australia-Japan 

90.00 

80.00 

70.00 

:c 60.00 .E 

::l 50.00 :a 

... 

C1) 

a. 40.00 

.l!l 

c 

C1) 30.00 0 

II) 20.00 2-

Q) 

(J 10.00 

'i: 

Il. 0.00 

Year 

--+- sinter feed 

lump 

Lump, simply defined, is naturally occurring 'pellets' requiring simple crushing and screening before shipment. It must 

meet strict minimum chemical characteristics, generally 62+% Fe, as it is not processed and forms a direct charge to the 

blast furnace. More importantly it must meet specific physical characteristics. Once crushed to -31.5mm+6.3mm (-1 \4 

inch +\4 inch) in size, it must not degradate during handling. It is easier to handle, does not roll around in the furnace, as 

do pellets and is less polluting than fines or concentrate (dust) and easier to handle during transport. It commands a 

premium to fines (-6.3mm) and does not require the grinding and processing to form pellets. All blast furnaces use a 

variable combination of sinter, lump and/or pellets as input or direct charge. Individual blast furnaces are extremely 

variable in their direct charge composition. Generally, the US steel producers use 75+% pellets in their blast furnaces 

whiles the rest of the world uses sinter feed (60+%) as a dominant burden charge. The majority of blast furnaces 

increasingly blend and mix the types of ores used as direct charge to reduce swelling, increase throughput, reduce energy 

cost, reduce coke consumption and generally improve the steel making process while reducing pollution and 

environmental concerns. Although, specific charge mixes can vary dramatically, the average blast furnace mix is 

estimated as follows: 

A verage Ch arge M' IX ID . h t e BI ast F urn ace (1990' s ) 

Region Lump Pellets Sinter 

USA 3% 75% 22% 

Europe 14% 17% 69% 

Japan 19% 16% 65% 

Source: Ullmans 

Importantly lump has a significant price advantage over pellets, being 50+% cheaper. It can be stockpiled and used as 

direct charge to increase output when demand is high. Pellets will breakdown if stored for lengthy periods. Sinter and 

pellet plants cannot incrementally increase production without significant capital outlays. Despite this advantage, there 

are strong views amongst the world's steel mills on cost and productivity advantages of the various blast furnace 

charges. 

There is an increasing demand for a new quality lump ore supply. Two of the main sources, the BHPBIO and RTHI's 

Brockman lump ores in the Pilbara of northwest Australia are being depleted. As mining depths increase, the ores are 

becoming softer and moisture content increases. Output is shifting to the Marra Mamba lump ores, but they are softer, 

have a lower lump content, are lower grade and contain approximately 10% moisture. This translates to an approximate 

9 
10% loss in the value of each tonne of ore shipped as Marra Mamba replaces Brockman as the primary Australian source

of lump iron ore.

Source % Lump/Fines % Fe Comments

Brockman, Australia 45/55 63.0 Major supply of lump for 35 years, limp being mixed with

Marra Mamba ores

Yandi, Australia 5/95 58.0 Primarily sinter feed

Marra Mamba, Australia 35/65 60.5 Low P, softer ore, lower Fe levels

Carajas, Brazil 5/95 65.5 Ore platy and subject to degradation

Sishen, South Africa 60/40 66.0 High alkali ore, demerit in price, although penalty has been

reduced for lump from 28% in 1992 to 14% in 1999. Fines

demerit has remained constant at 20%.

Source: Annual Reports, Skillings

Since 1983 demand for lump has remained high while supply has been stagnant. In 1983 lump output totalled 107.5

million tonnes, representing 44.8% of the seaborne trade and 25% of total world iron ore supply. By 1999, lump output

totalled just 77.1 million tonnes, representing just 19% of the seaborne trade and 7.6% of world output. The market has

and will quickly absorb any new supply of lump at the expense of pellets and concentrate/sinter fines. Sinter plants

cannot increase output in the short-term to deal with increased demand and pellets require expensive processing to

produce.

Production in 2004 remained strong total iron ore output increasing by 9.9% to 1,203 million tonnes. Exports also

increase to 650 million tonnes, a rise of 12.3%. Chinese demand remained strong with imports of 208 million tonnes of

iron ore. Domestic production is in excess of 120 million tonnes (normalised to 65% Fe) or 250 million tonnes (actual)

of low grade and low quality iron ore. It is estimated that approximately 60 million tonnes of iron ore was imported into

China on a spot basis in 2004. This explains the ubiquitous trading groups that have invaded virtually every mining

convention. UNCTAD reports that unofficial iron ore production in China is 50 to 60 million tonnes of iron ore or

approximately 25% of official production. This indicates that perhaps there is a considerable underestimation of the

actual demand in China and the remainder of the world as a grey market has developed in iron ore trade.

China has recently announced plans to establish "quotas" for imports of raw materials. These "quotas" are not

restrictions on imports, but an attempt to establish more accurate import/export trade data that is currently no better than

a guess. Steel companies and iron ore producers, both private and state controlled entities have been importing

considerable amounts of raw materials and the government is attempting to more accurately estimate both imports of

raw materials, but also accurately gauge output. It has been estimated that actual steel production in China may be

underreported by as much as 10-20% (The Economist).

Iron ore prices have increased by 9% in 2003, 18.6% in 2004 and an unprecedented 71.5% for 2005. These increases

have not yet slowed demand for iron ore products in the short-term as virtually all iron ore production has been bought

and steel mills, particularly the Chinese, have been scouring the world for new sources of quality iron ore. In addition, it

is reported that several steel mills do not yet have contracts for all required inputs for 2005. North American steel mills

are operating at capacity and shortages of iron ore, scrap steel and coking coal, all essential components in the steel

making process, continue to be reported. Although, this shortage will be alleviated in the near future by increased

production particularly in Brazil and Australia, the consolidation and dominance in control of the export trade has

opened opportunities for future production of quality iron ores.

Primary Sources of Seaborne Traded Lum p Ore

10

 EE-RM/STD-00-550 COMMENT 86

i I 

Iron Mines Corporation 

10% loss in the value of each tonne of ore shipped as Marra Mamba replaces Brockman as the primary Australian source 

of lump iron ore. 

p' nmary s ources 0 fS ea b orne T d ra e dL ump o re 

Source % Lump/Fines %Fe Comments 

Brockman, Australia 45/55 63.0 Major supply of lump for 35 years, limp being mixed with 

Marra Mamba ores 

Yandi, Australia 5/95 58.0 Primarily sinter feed 

Marra Mamba, Australia 35/65 60.5 Low P, softer ore, lower Fe levels 

Carajas, Brazil 5/95 65.5 Ore platy and subject to degradation 

Sishen, South Africa 60/40 66.0 High alkali ore, demerit in price, although penaltY has been 

reduced for lump from 28% in 1992 to 14% in 1999. Fines 

demerit has remained constant at 20%. 

Source: Annual Reports, SkIllmgs 

Since 1983 demand for lump has remained high while supply has been stagnant. In 1983 lump output totalled 107.5 

million tonnes, representing 44.8% of the seaborne trade and 25% of total world iron ore supply. By 1999, lump output 

totalled just 77.1 million tonnes, representing just 19% of the seaborne trade and 7.6% of world output. The market has 

and will quickly absorb any new supply of lump at the expense of pellets and concentrate/sinter fines. Sinter plants 

cannot increase output in the short-term to deal with increased demand and pellets require expensive processing to 

produce. 

Production in 2004 remained strong total iron ore output increasing by 9.9% to 1,203 million tonnes. Exports also 

increase to 650 million tonnes, a rise of 12.3%. Chinese demand remained strong with imports of208 million tonnes of 

iron ore. Domestic production is in excess of 120 million tonnes (normalised to 65% Fe) or 250 million tonnes (actual) 

of low grade and low quality iron ore. It is estimated that approximately 60 million tonnes of iron ore was imported into 

China on a spot basis in 2004. This explains the ubiquitous trading groups that have invaded virtually every mining 

convention. UNCTAD reports that unofficial iron ore production in China is 50 to 60 million tonnes of iron ore or 

approximately 25% of official production. This indicates that perhaps there is a considerable underestimation of the 

actual demand in China and the remainder of the world as a grey market has developed in iron ore trade. 

China has recently announced plans to establish "quotas" for imports of raw materials. These "quotas" are not 

restrictions on imports, but an attempt to establish more accurate import/export trade data that is currently no better than 

a guess. Steel companies and iron ore producers, both private and state controlled entities have been importing 

considerable amounts of raw materials and the government is attempting to more accurately estimate both imports of 

raw materials, but also accurately gauge output. It has been estimated that actual steel production in China may be 

underreported by as much as 10-20% (The Economist). 

Iron ore prices have increased by 9% in 2003, 18.6% in 2004 and an unprecedented 71.5% for 2005. These increases 

have not yet slowed demand for iron ore products in the short-term as virtually all iron ore production has been bought 

and steel mills, particularly the Chinese, have been scouring the world for new sources of quality iron ore. In addition, it 

is reported that several steel mills do not yet have contracts for all required inputs for 2005. North American steel mills 

are operating at capacity and shortages of iron ore, scrap steel and coking coal, all essential components in the steel 

making process, continue to be reported. Although, this shortage will be alleviated in the near future by increased 

production particularly in Brazil and Australia, the consolidation and dominance in control of the export trade has 

opened opportunities for future production of quality iron ores. 

10 
rcm tv1 Tics Corpcrcilit n

GLOSSARY

Blast Furnace A furnace for the smelting of pig iron from iron oxides; combustion is intensified by a blast of air and/or

other inert gases

Beneficiation

CIF

The process of separating, concentrating and classifying ore by particle size and or some other

characteristic (e.g. specific gravity, magnetic susceptibility, surface chemistry, etc.) in order to obtain the

mineral or metal of interest.

Cost/customs, insurance and freight. Price of a bulk commodity delivered to a customer's terminal port.

Price includes shipping cost and is the common quoted price to bulk commodities sold in Europe. Also

known as C&F.

Concentrate Very fine grained (less than 0.15 mm or 150 μm) particles of iron ore (ultrafines) generated by mining,

grinding, handling and transporting of iron ore, with no practical direct application in the steel industry,

unless the material is aggregated into pellets through an agglomeration process. In many iron ore deposit,

it is necessary to grind the mineralization finely to liberate the iron minerals.

DRI Direct Reduced Iron. Process that converts iron ore into DRI or HBI using natural gas or coking coal

without melting. DRI or HBI by-pass the blast furnace stage in the steel making process.

DWT

Fe Unit

Deadweight tonnes. The measurement unit of a vessel's capacity for cargo, fuel, oil, stores and crew,

measured in tonnes or 1,000 kilograms. A vessel's total deadweight is the total weight that the vessel can

carry when loaded to a particular load line.

A measure of the iron content in the iron ore that is equivalent to 1% iron content in 1 tonne or iron ore.

The two most commonly used units are the dry long tonne unit (dltu) or 22.4 pounds and dry metric tonne

unit (dmtu) or 10 kilograms (22.046 pounds). The dry measure discounts the internal moisture of the iron

ore being shipped.

Fines(Sinter Feed) Refers to iron ore with particles in the range of 0.15 mm and 6.3 mm in diameter. Suitable for sintering.

FOB

Hematite

HBI

Free on board. Price of a bulk commodity delivered to producer's terminal port. Price excludes shipping

and is the common quoted price to bulk commodities sold in Asia.

An iron oxide mineral whose composition is Fe203 and stoicheiometric maximum iron content is 69.94%

iron (Fe).

Hot Briquetted Iron. Direct reduced iron that has been processed into briquettes. Instead of using a blast

furnace, the oxygen is removed from the ore using natural gas and results in a substance that is 90-92%

iron. Because DRI (direct reduced iron) may spontaneously combust during transport, HBI is preferred

when the metallic mineral must be stored or moved.

Long Ton A unit of measure in bulk commodities equivalent to 2,240 pounds.

Long Tonne Unit

Lump

A unit of measurement used in the iron ore industry for the sale of iron ore. It is equal to I% iron content

in a long ton of ore or 22.4 pounds. Quoted a dry long ton unit (dltu).

Iron ore with the coarsest particle size in the range of 6.3 mm and 50 mm, with the preferred range

between 6.3 mm and 31.5 mm.

Magnetite An iron oxide mineral whose composition is Fe304 and stoicheiometric maximum iron content is 72.36%

iron (Fe).

Mineral Deposit An identified in-situ mineral occurrence from which valuable or useful minerals may be received. Mineral

deposit estimates are not precise calculations, being dependent on the interpretation of limited information

on the location, shape and continuity of the occurrence of mineralization and on the available sampling

results.

11

 EE-RM/STD-00-550 COMMENT 86

i I 

Iron [\/lines Corporation 

GLOSSARY 

Blast Furnace 

Beneficiation 

CIF 

Concentrate 

DR! 

DWT 

Fe Unit 

Fines(Sinter Feed) 

FOB 

Hematite 

HBI 

LongTon 

Long Tonne Unit 

Lump 

Magnetite 

Mineral Deposit 

A furnace for the smelting of pig iron from iron oxides; combustion is intensified by a blast of air and/or 

other inert gases 

The process of separating, concentrating and classifying ore by particle size and or some other 

characteristic (e.g. specific gravity, magnetic susceptibility, surface chemistry, etc.) in order to obtain the 

mineral or metal of interest. 

Cost/customs, insurance and freight. Price of a bulk commodity delivered to a customer's terminal port. 

Price includes shipping cost and is the common quoted price to bulk commodities sold in Europe. Also 

known as C&F. 

Very fine grained (less than 0.15 mm or ISO f.lm) particles of iron ore (ultrafines) generated by mining, 

grinding, handling and transporting of iron ore, with no practical direct application in the steel industry, 

unless the material is aggregated into pellets through an agglomeration process. In many iron ore deposit, 

it is necessary to grind the mineralization finely to liberate the iron minerals. 

Direct Reduced Iron. Process that converts iron ore into DRI or HBI using natural gas or coking coal 

without melting. DRI or HBI by-pass the blast furnace stage in the steel making process. 

Deadweight tonnes. The measurement unit of a vessel's capacity for cargo, fuel, oil, stores and crew, 

measured in tonnes or 1,000 kilograms. A vessel's total deadweight is the total weight that the vessel can 

carry when loaded to a particular load line. 

A measure of the iron content in the iron are that is equivalent to 1 % iron content in 1 tonne or iron ore. 

The two most commonly used units are the dry long tonne unit (dltu) or 22.4 pounds and dry metric tonne 

unit (dmtu) or 10 kilograms (22.046 pounds). The dry measure discounts the internal moisture of the iron 

ore being shipped. 

Refers to iron ore with particles in the range of 0.15 mm and 6.3 rnm in diameter. Suitable for sintering. 

Free on board. Price of a bulk commodity delivered to producer's terminal port. Price excludes shipping 

and is the common quoted price to bulk commodities sold in Asia. 

An iron oxide mineral whose composition is Fe203 and stoicheiometric maximum iron content is 69.94% 

iron (Fe). 

Hot Briquetted Iron. Direct reduced iron that has been processed into briquettes. Instead of using a blast 

furnace, the oxygen is removed from the ore using natural gas and results in a substance that is 90-92% 

iron. Because DRI (direct reduced iron) may spontaneously combust during transport, HBI is preferred 

when the metallic mineral must be stored or moved. 

A unit of measure in bulk commodities equivalent to 2,240 pounds. 

A unit of measurement used in the iron ore industry for the sale of iron ore. It is equal to 1 % iron content 

in a long ton of ore or 22.4 pounds. Quoted a dry long ton unit (dltu). 

Iron ore with the coarsest particle size in the range of 6.3 mm and 50 mm, with the preferred range 

between 6.3 mm and 31.5 mm. 

An iron oxide mineral whose composition is Fe304 and stoicheiometric maximum iron content is 72.36% 

iron (Fe). 

An identified in-situ mineral occurrence from which valuable or useful minerals may be received. Mineral 

deposit estimates are not precise calculations, being dependent on the interpretation of limited infonnation 

on the location, shape and continuity of the occurrence of mineralization and on the available sampling 

results. 

11 
Mineral Reserve

Mineral Resource

Ore

Pellet Feed (ultra-fines)

Pellets

Pig Iron

Reducibility

Seaborne Market

Sinter Feed (Fines)

Sintering

Specularite

Ton

Tonne

Ultra-fines

That part of a measured mineral resource or indicated mineral resource which can be extracted legally and

at a profit under economic conditions that are specified and generally accepted as reasonable by the

mining industry and which is demonstrated by a scoping study or feasibility study.

Under CIM Standards, a concentration or occurrence of natural, solid, inorganic or fossilized organic

material in or on the Earth's crust in such form and quantity and of such a grade or quality that it has

reasonable prospects for economic extraction. The location, quantity, grade, geological characteristics and

continuity of a Mineral Resource are known, estimated or interpreted from specific geological evidence

and knowledge. Mineral Resources fall under the following categories: measured mineral resource;

indicated mineral resource; and inferred mineral resource.

The concentration of metals and their chemical compounds within a body of rock that can be exploited

profitably under current economic conditions.

Very fine grained (less than 0.15 mm or 150 μm) particles of iron ore generated by mining, grinding,

handling and transporting of iron ore, with no practical direct application in the steel industry, unless the

material is aggregated into pellets through an agglomeration process

Agglomerated ultra-fine iron ore particles of a size and quality suitable for particular steel making

processes. Pellets generally range from 8 mm to 18 mm in size with the preferred size between 12.5 mm

and 15 mm.

Melted iron produced in the blast furnace

The reduction of iron oxide to eventual pig iron through the liberation of oxygen.

Comprises the total iron ore trade (imports and exports) between countries using ocean bulk vessels.

Refers to iron ore with particles in the range of 0.15 mm and 6.3 mm in diameter. Suitable for sintering.

Refers to the agglomeration of small particles into a coherent mass by heating without melting.

A variety of hematite characterized by aggregates of silvery, metallic, specular hematite flakes or tabular,

anhedral crystals. Also referred to as specular hematite.

Short ton (2,000 pounds).

A unit of measure equal to 1,000 kilograms or approximately 2,204.6 pounds

Very fine grained (less than 0. 15 mm or 150 gm) particles of iron ore generated by mining, grinding,

handling and transporting of iron ore, with no practical direct application in the steel industry, unless the

material is aggregated into pellets through an agglomeration process. In many iron ore deposit, it is

necessary to grind the mineralization finely to liberate the iron minerals. Also referred to as concentrate.

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 EE-RM/STD-00-550 COMMENT 86

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Iron Mines Corporation 

Mineral Reserve That part of a measured mineral resource or indicated mineral resource which can be extracted legally and 

at a profit under economic conditions that are specified and generally accepted as reasonable by the 

mining industry and which is demonstrated by a scoping study or feasibility study. 

Mineral Resource Under ClM Standards, a concentration or occurrence of natural, solid, inorganic or fossilized organic 

material in or on the Earth's cmst in such fonn and quantity and of such a grade or quality that it has 

reasonable prospects for economic extraction. The location, quantity, grade, geological characteristics and 

continuity of a Mineral Resource are known, estimated or interpreted from specific geological evidence 

and knowledge. Mineral Resources fall under the following categories: measured mineral resource; 

indicated mineral resource; and inferred mineral resource. 

Ore The concentration of metals and their chemical compounds within a body of rock that can be exploited 

profitably under current economic conditions. 

Pellet Feed (ultra-fines) Very fine grained (less than 0.15 mm or 150 /lm) particles of iron ore generated by mining, grinding, 

handling and transporting of iron ore, with no practical direct application in the steel industry, unless the 

material is aggregated into pellets through an agglomeration process 

Pellets Agglomerated ultra-fine iron ore particles of a size and quality suitable for particular steel making 

processes. Pellets generally range from 8 mm to 18 mm in size with the preferred size between 12.5 mm 

and 15 mm. 

Pig Iron Melted iron produced in the blast furnace 

Reducibility The reduction of iron oxide to eventual pig iron through the liberation of oxygen. 

Seaborne Market Comprises the total iron ore trade (imports and exports) between countries using ocean bulk vessels. 

Sinter Feed (Fines) Refers to iron ore with particles in the range of 0.15 mm and 6.3 mm in diameter. Suitable for sintering. 

Sintering Refers to the agglomeration of small particles into a coherent mass by heating without melting. 

Specuiarite A variety of hematite characterized by aggregates of silvery, metallic, specular hematite flakes or tabular, 

anhedral crystals. Also referred to as specular hematite. 

Ton Short ton (2,000 pounds). 

Tonne A unit of measure equal to 1,000 kilograms or approximately 2,204.6 pounds 

Ultra-fines Very fine grained (less than 0.15 mm or 150 /lm) particles of iron ore generated by mining, grinding, 

handling and transporting of iron ore, with no practical direct application in the steel industry, unless the 

material is aggregated into pellets through an agglomeration process. In many iron ore deposit, it is 

necessary to grind the mineralization finely to liberate the iron minerals. Also referred to as concentrate. 

12