A bonanza in new iron ore mining projects may herald lower prices in coming years as capacity begins to catch up with rising Asian demand, according to a long-time industry watcher.

Fat Prophets resource analyst Nick Raffan said he sees parallels
between the current flurry of investment in new and expanded mines
aimed at satisfying China’s iron ore hunger and the rush to meet
Japanese coal orders in the late 1970s from new mines in Queensland,
the Hunter Valley in NSW and elsewhere.

The latter surge led to an over-supply and subsequent price slump for the energy source that lasted decades.

”Traditionally,
miners have never been able to stop themselves eventually from
over-producing,” said Mr Raffan. ”It’s in their nature.”

Australia
remains dependent on commodities for more than half its exports, with
shipments to China of iron-ore and related concentrates alone worth
$22.1 billion in 2008-09, according to the Department of Foreign
Affairs and Trade. Apart from helping to narrow Australia’s trade gap,
rising commodity prices and volumes bolster state and federal coffers.

In
volume terms, Australia exported 323.3 million metric tonnes of iron
ore and pellets to China in 2008-09, according to the Australian Bureau
of Agricultural and Resource Economics.

Expansion under way

While
Mr Raffan acknowledges the strength of the current up-swing in iron ore
as Asian economies – particularly China’s – rebound from last year’s
slump, he says there is a risk miners in Australia and elsewhere are
increasing production too quickly.

As of October, investments in
Australia to expand or develop resources totalled $112.5 billion, ABARE
numbers said this week. Iron ore mining or infrastructure capex
projects accounted for about 15 per cent of that total, with nearly 40
additional projects under consideration.

Nor is Australia alone in
undertaking large investments to expand capacity. Vale, the Brazilian
competitor to BHP Billiton and Rio Tinto, said last month it will spend
$US12.9 billion ($14 billion) to raise production and exports,
including funding two new iron ore mines.

Bloomberg reports Vale expects to export 140 million tons of iron ore to China this year.

Meanwhile
China, which is producing about half the world’s steel, is investing in
mining capacity of its own. Projects include mines in Australia, Africa
and South America.

Mr Raffan doesn’t think the additional Brazil’s
output, nor China’s own investments, is on the minds of local resource
project developers.

”I think everyone sees things through rose-coloured glasses at the moment,” he said.

Sky-high hopes

BHP
Billiton’s chief executive officer Marius Kloppers reiterated his
company’s confidence in China’s demand for resources holding up.

In
a speech this week to the Lowy Institute, Mr Kloppers said China would
build 50,000 skyscrapers over the next 20 years, or 600 times the
number Sydney now has.

Also fuelling China’s resource hunger will be
further urbanisation, with the country expected to have 220 cities of
more than one million people by 2030, compared with Europe’s total of
35 now.

Such confidence in China’s growth is helping to nudge iron ore prices higher after a drop of about a third last year.

Spot
prices for iron ore recently climbed to $US104 a tonne, while a
consensus of analysts polled by Bloomberg forecasts the contract price
for iron ore – about $US60 a tonne before freight – to rise by 14 per
cent next year.

While China’s economic growth this year has
surprised on the upside, some analysts are raising doubts about its
reliance once massive state spending and directed lending subside.

Credit
Suisse, a Swiss bank, points to signs that the economy is losing some
momentum, comparing China’s yearly industrial production rate with the
PMI new orders index – a gauge of manufacturing activity.

China’s
industrial production rose 16.1 per cent in the year to October
year-on-year, from 13.9 per cent the month before, according to the
latest figures. The PMI new orders index, though, fell in October to
57.6 from 58.

”Going forward, if Chinese banks only lend at a RMB
200-250 billion ($32-40 billion) per month pace, we will see fixed
asset investment growth slow, consistent with less support for
commodity prices,” said Credit Suisse analyst Damien Boey.

An
export recovery may help China if its banks slow lending to avoid asset
bubbles, he said. ”But certainly, growth will not be as good as it was
post-first half stimulus,” he said.

Flattening trajectory

Mine
Life senior analyst Gavin Wendt said he’s not as pessimistic on prices
as some, but based on the influx of new mining projects, ”it’s getting
harder to see the same price run-ups.”

”The rising price trajectory is going to flatten off even as the demand continues to increase from China and India,” he said.

The
price for ore will move in a range between $US80-$US120 per tonne over
the next couple of years, Mr Wendt said, easing in the long term to a
$US80-$US100 range as new production comes on-stream.

Mr Wendt said
the Chinese lining up to partner with Australian miners are trying to
ensure price stability in the years to come by expanding sources of
production as the Japanese did with coal beginning in the 1980s.

Macquarie view

The dim views don’t accord with those of Macquarie Bank analyst Jim Lennon, Bloomberg News reported today.

Mr Lennon predicts global commodity demand will have a steady recovery next year, with China leading consumption.

China
accounted for about 50 per cent of global commodity demand this year,
up from about a third a year ago, Lennon said at a conference in Hong
Kong.

Metal prices have rallied 81 per cent this year in London on
Chinese purchases, and as a weaker dollar and expectations that the
world is poised to recover from its worst recession since World War II
stoked demand. Investors raised holdings in commodities to the highest
levels in at least three years, BOfA Merrill Lynch Global Research said.

”The
leap in demand for commodities in China this year has been quite
staggering,” Lennon said. ”You can see where these commodities are
going by the increase in production in China of goods like autos.”

Steel
production in China this year may jump to 570 million metric tons, up
from about 500 million tons last year, Lennon said. Macquarie’s
forecast compares with the 565 million tons predicted by the China Iron
& Steel Association yesterday.

Source: Business Day

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