China's steel mills are ravenous for iron ore. Not even the global recession has stopped them from consuming more this year. And Kumba Iron Ore (KIO), Africa's biggest producer, is keen to feed the dragon.
According to KIO projects head Francois Louw, the company, which is a subsidiary of Anglo American, has the potential to boost its production by nearly 40% over the next decade. A drive towards this level of production will depend on whether the necessary rail, power and water infrastructure is built. KIO says it could produce 65 Mt/year of the steel-making ingredient by 2017/2018.
It plans on mining about 40 Mt in 2009. Last week Kumba unveiled a new name for its R8,5bn Sishen South project, near Postmasburg: Kolomela (meaning to persevere in Setswana), which will produce 9 Mt/year by 2012/2013. KIO also says it is studying a project to grow that output.
In addition to these plans, there are also studies under way for a second expansion at its original Sishen mine, north of Kolomela, which could add another 10 Mt/year of output at the mine in eight or nine years' time. The Sishen Expansion Project, commissioned last year, increased production by 13 Mt/year.
Louw says Kumba is also talking to new iron mining companies about partnerships with them in the Northern Cape.
Key to these expansion opportunities will be the iron ore market. During a trip to the Northern Cape last week, KIO CEO Chris Griffith projected a supply shortfall in 2013 (see graph), which bodes well for prices.
Last year, when demand outstripped supply, prices leapt by nearly 100%. Will this happen again in 2013? Says Griffith: "I don't think we'll see a 100% spike again, but there may be volatility in spot prices." Most iron ore is traded under long-term contracts, where an industry benchmark price is set at the beginning of each year.
For the first time in three decades the benchmark system spluttered this year, when Chinese steel producers refused to accept the 35%-45% reduction in prices Japanese and Korean steel mills agreed on. But Griffith says that unofficially the Chinese have been buying at these levels.
Next year, he predicts producers should enjoy a 10% price rise. But PriceWaterhouseCoopers metals analyst Jim Forbes says the iron ore price may decline by 10% next year.
So, the immediate future isn't looking awfully rosy for Kumba, particularly with the stronger rand. But if you're looking for a long-term share for your commodities portfolio, this is one to which you should give serious consideration.
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