Feb. 3 (Bloomberg) -- OAO Novolipetsk Steel, the largest producer of steel in Russia, will expand iron ore projects valued at as much as $1 billion and with some of the world’s lowest costs as it sees demand from China buoying prices.
“Unlike coal, iron ore prices entered a new normal, with a relatively high level, in the past six to seven years,” Konstantin Arshakuni, director of strategy and business development, said in an interview in Moscow. There are some signs China, the largest consumer, has a “serious shortage.”
Prices for the ore will average about $125 a metric ton in 2014, Arshakuni said, after they recovered from $112 last May.
NLMK, as the company’s known, spent $8.9 billion on expansion from 2008 through 2013 to take 21 percent of the Russian market. It was helped by low costs, with its Stoilensky GOK iron-ore operation one of Russia’s largest open-pit mines and one of the world’s cheapest producers at $23 a ton. The transportation to NLMK’s main operation is as low as $7 a ton.
The mine in Belgorod region, Central Russia, 250 kilometers (150 miles) away from NLMK operations, its main customer, “is perfectly positioned for further development,” Arshakuni said.
The mine has a 60 percent to 70 percent margin on earnings before interest, taxes, depreciation and amortization on average and produced 14 million tons of iron ore concentrate last year.
“We have our greenfield projects in coking coal on hold and keep them as a long term option but iron-ore projects at low-cost Stoilensky GOK are advancing and will constitute the largest part of our investments in 2014-2017,” Arshakuni said.
The full investment strategy will be presented to investors on the company’s Capital Market Day on Feb. 10 in London. NLMK, which has gained 6 percent this year, was 0.3 percent lower at 51.63 rubles in Moscow trading at 5:36 p.m.
“We plan several projects at Stoilensky GOK, which can further increase NLMK’s self-sufficiency in iron ore and make the group more cost-effective,” the executive said. The site ships more than 80 percent of concentrate to NLMK and about 2.5 million to 3 million tons to third parties, mostly in Ukraine.
NLMK buys 5.5 million to 6 million tons of iron-ore pellets from Metalloinvest Holding Co. a year as it doesn’t have its own capacity to process all the concentrate it produces.
“We started construction of a pellet plant that’s expected to be operational in 2016,” Arshakuni said. Initial capacity will be 6 million tons and 15 percent of investment is in place. The plant needs about 6.6 million tons of concentrate and NLMK aims to raise output at Stoilensky GOK by 5.5 million tons by 2017.
The project includes expanding raw ore-mining capacity to 42 million tons from 32 million and building a processing plant, he said, declining to give the capital spending before Feb. 10.
“The projects may be worth up to $1 billion, and will be able to give NLMK more productive flexibility,” said George Buzhenitsa, an analyst at Deutsche Bank AG.
NLMK expects demand from China to sustain prices.
Reserves in the country, which last year consumed more than 60 percent of all seaborne iron ore, are becoming poorer and “producers are beginning to build high cost underground iron mines as open-pit ore reserves are depleting,” Arshakuni said. “About 30 percent of China iron ore is produced at a cost higher than $130 a ton for concentrate.”
The largest iron ore producers, Rio Tinto Plc, Vale SA and Fortescue Metals Group Ltd., probably won’t raise output to their full capability as “additional volume may unbalance the market and damage seriously their existing iron ore profits,” he said.
“Volatility in iron ore prices will remain high but we see some price support at about $110 a ton.”
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