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Marketing of Iron Ore: Grade Influences on Price, What Can the Market Accept Particularly With Lower Grade and

Beneficiated Ore?

Understanding the evolution of pricing to predict the future of demand and supply

Reviewing the history of iron ore pricing

Examining the evolution of spot and now index pricing

Defining the transition from FOB to Far East markets to CFR sales

Predicting the future for iron demand and supply

Understanding the outcomes of pricing cycles

Determining the influences of grade on price via penalties and lower Fe index price levels

Assessing the future of low grade natural ores and beneficiated high grade ores on price indices

In The Beginning ……..

• Late 1960’s Japanese market the focus for fledgling Australian iron ore industry

• Blast Furnace operations based on high levels of Direct Charge materials, (Lump and Pellets)

• Two Pilbara pellet plants, (Dampier and Cape Lambert) along with pellet plants in Japan, (Hirohata works NSC and Kobe and Kakogawa works of Kobe Steel)

• Savage River, (controlled by Pickards Mather) also in the mix

• Fines, the by-product of Lump processing, limited use, this the LOW GRADE product

1960’s to 1970’s

• Early sales contracts FIXED PRICES for 3 years

• Producers were making losses, overtures to JSM saw Annual pricing agreed

• Prices in DLTU, (Imperial units despite Japan having metric system)

• Formation of OPEC in early 1970’s saw oil prices rise dramatically, resulting in MAJOR industry changes: pellet plants closed

• Pellet contracts cancelled, converted to FINES, direct charge exports decreased

• Sintering the new focus, Fines moving to the dominant product

Sintering: Technology Changes

• Closure of pellet plants, impacted both Pilbara and Japan

• Development of sintering techniques to ‘absorb’ additional fines became a priority

• Sintering of concentrates , haematite and goethite especially needed development at the same time

• Establishment of fundamental research into achieving the most from sintering including innovative techniques eg ISSF

• Beginnings of understanding of the sintering of difficult and lower grade ores

Sintering Developments: JSM’s the Drivers

• JSM’s take a long term business view

• Reliance on Pilbara for 60% of iron ore supply

• Direct and indirect investments in BHPB and Rio operations

• Initial sales agreements had provisions for ‘Joint Technical Committees”

• JSM ‘sponsored’ development of goethitic and Marra Mamba ores by developing sintering techniques to maximise Pilbara ore use, ESPECIALLY Fines. (NB: JSM’s investigated the sintering of Non

Pilbara ores as well)

• Value in Use the driver BUT, the term used by Pilbara producers NOT the JSM’s: Where was price?

Fines Dominate the Market: Sintering “Understood”

• Haematite Fines from BHP Iron Ore, HI, Goldsworthy: High Grade Fines Fe +60%

• Goethitic Fines under test, (Yandi ore) and Robe usage rates up as value of Low Grade Fines, Fe +57% value assessed to be better than haematite Fines

• Earthy Australian ores identified as good blending ores for concentrates and Brazilian Fines due to physical behaviour

• Pseudo Particles and Agglomerating characteristics the new watch words in sintering technology.

• Low Grade chemistry: High Grade sintering performance

A Quick Recap

• Lump and Pellets the product of choice

• Fines and Sintering forced upon steelmakers

• Physical properties enhanced sinter performance

• Chemistry grade did/does not reflect value

• Price: wait for it!

Emergence of China Ore Demand and Price Impact

• Contractual price discount for Australian ores into China based on “developing market-special circumstances”

• Limited purchasing channels, highly regulated market

• Initial sales heavily biased to Lump ores: (Sales agreements reflected Lump:Fines ratios)

• Deregulation of purchasing channels saw multiple contract defaults by Chinese buyers

• Completion of Phase 3 of Baosteel operations coincided with rapid growth of steel production and iron ore demand

• India iron ore offered from myriad of Sellers, spot market began as ore availability variable

Spot Market: Paradigm Pricing Shift

• China demand surges, Indian ore floods the market with guaranteed Fe content, often meaningless

• Anything goes as did many Traders who disappeared overnight

• Low grade ore accepted as demand soared

• Rumours of high grade as top one third of rail cars, rubbish or dirt underneath

• Pilbara operations negatively impacted by weather continued operating BUT quality suffered as producers shipped whatever they could produce to meet demand

• Switch from FOB to CFR as suppliers sought opportunities to control cargo delivery: Buyers accepted as few alternative options

Another Quick Recap

• Lump and Pellets the initial products of choice

• Oil Shock: Fines and Sintering forced upon steelmakers

• Physical properties enhanced sinter performance

• Chemistry grade alone did/does not reflect value

• China demand changed nature of the industry

• Price moved from FOB to CFR as China’s demand provided opportunities for suppliers to control deliveries

• Emergence of Index pricing

Processing Transition: Alumina

• Initial processing in Pilbara was all about lowering of ALUMINA

• JSM’s were focussed on slag volumes and Alumina was the key

• BHP and Hamersley Iron both introduced processing plants at to remove alumina from existing ore grades

• Robe followed suit with wash plants at Pannawonica to remove alumina

Always Exceptions:

• Kobe and Nisshin Steel had special arrangements with Goldsworthy Mining Co for HIGH SILICA fines as their works were silica poor!

• Price impact in PENALTIES and Costs of Production

Subsequent Pilbara Processing: Silica and Alumina

• Current processing in Pilbara was all about lowering of SILICA

• Focus has switched from Japan to China

• BHPB, Rio (HI and Robe) retain processing, FMG introduced 100% ore processing plants to remove silica and alumina

• Emerging producers, eg Roy Hill/Flinders Mines, following FMG lead

• NO special arrangements for JSM who seek LOWER silica for opportunity tonnage

• Price impact: It’s in the INDEX!

Future Outlook

• Recently Chinese National Government announced elimination of 80Mt of outdated crude steel capacity

• Hebei Province confirmed 40Mt of capacity for elimination is planned in Hebei Province

• Ongoing and recent focus on pollution control in the steel industry, a planned move to more pelletising to partially replace sintering

• Recent editions of Platts supports this along with advice of increase in Lump and pellet premiums

• Pellet production increase: raw material source and price?

• Impact on Fines price, is concentrates day almost here?

Conclusion • Prices will reflect supply and demand

• China remains the dominant market for all grades

• Low grade chemistry is not necessarily reflective of Value

• Supply and demand experiencing ‘outside’ influences eg environmental controls

• What role government control in China?

• More processing most likely

14 Saladin Street, Swanbourne WA 6010, Australia

Tel +61 (0)8 9384 0346 www.ferrumconsultants.com