Off-Radar Iron Ore Exporters Helping Hasten Global Market Glut

Iron ore exports from half-a-dozen “off-the-radar” nations such as Peru and Iran are helping tip the $159 billion global iron ore market toward oversupply.

China’s Shougang Corp. and Hong Kong-based CAA Resources Ltd. (2112) are among companies expanding mines in these countries to feed Chinese steel mills. Exports from these emerging suppliers, the so-called EM6 exporters, gained about 30 percent last year, making them the largest source of seaborne supply growth after Australia, according to Goldman Sachs Group Inc.

“I would get on average probably 20 inquiries a week for 100,000 tons or more for one-year, five-year or six-year contracts,” said Phillip Thomas, president of closely held AussieMex SA de CV, which operates the Manto mine in Mexico. “Mostly from China but India is starting to crank up a bit.”

For the past decade China, the world’s biggest buyer of iron ore, has been seeking alternate sources of supply to break the stranglehold of the three biggest exporters led by Brazil’s Vale SA (VALE5) that control almost two-thirds of the global export market. Shougang is outlaying about $1.2 billion on an expansion in Peru, while ArcelorMittal (MT), the world’s biggest steelmaker, has three iron ore mines in Mexico.

Supply China

Malaysia, Chile and Indonesia make up the balance of EM6 nations. CAA Resources produced about 1.2 million metric tons last year at its operations in Malaysia. The Ibam Project may produce as much as 10 million metric tons in future, Chief Executive Officer Yang Li said in an e-mail interview.

BHP Billiton Ltd. (BHP), the world’s biggest mining company, last month joined Rio Tinto Group in predicting lower prices after key producers in Australia and Brazil spent billions of dollars expanding output to supply China.

CAA Resources’ Chinese clients are keen to diversify their supplier base from the dominant companies, Li said. CAA Resources is also in talks for two acquisitions in Malaysia.

An investment splurge on new mines, ports and transport systems is set to push the global export market into oversupply of 90 million tons this year from a balanced market last year, according to UBS AG. It expects the market to rise 12 percent this year to 1.347 billion tons.

Iron traded at $116.70 a ton yesterday. That compares with an average price of about $135 a ton last year, while prices are forecast to decline every year until at least 2017, according to data compiled by Bloomberg.

Large Mines

As recently as 2009, the EM6 nation’s accounted for the equivalent of the annual output of just one of Rio or BHP’s large mines in Australia, according to Goldman Sachs. Since then, their share of seaborne supply has more than doubled to 82 million tons last year.

Planned iron ore developments in Peru also include Chinese Nanjinzhao Group’s $3 billion Pampa de Pongo project and Strike Resources Ltd.’s $2.9 billion Apurimac and Cuscu projects.

The outlook among the group of six countries is set to diverge as lower prices will see high-cost suppliers struggle to remain profitable, and Indonesia enforces bans on the export of unprocessed mineral ore. Supply from the EM6 should remain stable around 80 million tons from 2014 onwards, according to Goldman Sachs.

“I feel comfortable that Chile and Peru go up, I’m pretty comfortable that Indonesia goes down and for Iran, Malaysia and Mexico, it is hard to tell,” Christian Lelong a Sydney-based commodity analyst with the bank, said in a phone interview. “You can see that there is some upside potential but nothing as definitive as what you can see for Chile and Peru.”

EM6 exports may increase further this year should the regulations on unprocessed ore exports by Indonesia not be properly enforced or end up being rescinded, Lelong said. Or strict enforcement may see a decline, he said.

To contact the reporter on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net

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