Steel mills expand iron ore output to ward off soaring import costs

Updated: 2010-07-02 11:34
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BEIJING- As the world's leading iron ore producers never reduce their appetite for price hikes, China's major steel mills have looked to domestic deposits as they plan to triple their exploration in six years to gradually wean off dependence on exports.

The Angang Steel Company Limited (Angang) and Benxi Iron & Steel (Group) Co Ltd (Bengang), the nation's leading steel makers in northeast Liaoning province, used to be 80 percent self-sufficient with their own iron ore supply. That ratio was the highest among domestic steel makers.

However, after decades of excavation, that could no longer meet the leaping demand. Currently, imports make up 40 percent of their needs. Sadly enough, the import prices have been almost tripled over the past five years.

"We are mulling a massive plan of tripling iron ore production over six years," Gao Lie, chairman of the board of Bengang, told Xinhua in an exclusive interview.

According to Gao, iron ore production would rise from the current 20 million tons to 60 million tons by the end of 2016, and that for the refined iron ore would be doubled from 10 million tons to 22 million tons.

The world's three iron ore giants -- Vale of Brazil, Rio Tinto and BHP Billion, which accounted for nearly 70 percent of the world' s iron ore shipments -- have all announced their plans to shorten the long-term agreements in international iron ore prices, indicating the end of the decades-old annual benchmark pricing system, in a bid to gain a stronger hold in price talks.

As the third quarter is approaching, the three mining giants asked for a price increase between 19 percent to 35 percent, which has not been set but quite possibly could become a reality, said Hu kai, an analyst with Umetal, an online steel information provider.

"The grim reality tells us we can not afford to wait and let soaring costs to eat up profits, but must dig more deposits in the home soil," Gao said.

Owning the largest iron ore reserve in Asia, or the Nanfen deposit, Bengang has also begun to develop four smaller mines with 433 million tons in reserves. It has also planned to invest more than 5 billion yuan in six years in these mines.

Li Weibo, chairman of the board of the Shenzhen-based Wanlijia Group, told Xinhua a subsidiary of his company, or Yixin Mining Corp, would sign an agreement with Bengang to jointly develop the Dataigou Mine, the world' s largest iron ore reserve, or with 3.4 billion tons located in the south suburb of Benxi city.

Angang, the nation's fifth largest steel mill, also eyes a massive output expansion. Shao Anlin, general manager of Angang' s mining section, said the company has raised 14.7 billion yuan to expand iron ore production by one-third to 68.5 million tons by 2015, and that number will hit 92 million tons by 2020, doubling the current output.

Angang and Bengang are among a group of Chinese steel makers who are searching for new ways out of the skyrocketing costs from imports. The Maanshan Iron & Steel Company in central China's Anhui province and Tangshan Iron & Steel in north China's Hebei province also have such expansion plans.

According to data released by the Ministry of Land Resources, China has 480 million tons of iron ore development capacity a year, which is both under construction and being planned for.

China produced 880 million tons of iron ore last year. After a number of new projects began, the annual output is expected to rise steadily.

Anshan and its surrounding areas have an iron ore deposit of 8.8 billion tons, and another 17 billion tons in potential deposits. In Benxi, 4 billion tons have been discovered and more than 13 billion tons are considered a potential windfall, according to the two companies.

The total reserve is adequate to feed the production of the two companies for another 100 years, even if they simply stop importing.

Hu Kai said China's iron ore deposits increased from 58.1 billion tons in 2001 to 62.4 billion tons in 2008. However, less than half of the reserves have been tapped.

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Wang Guoqing, an analyst with the Lange Steel Information Center, said although more reserves have been discovered in China, risks are still there.

He noted China's reserves are low grade ore that brings with it high development costs, while imported iron ore is much cheaper in processing with its high quality. That is part of the reason why domestic steel mills preferred to import rather than self-supply before the import price hike frenzy started as of 2003.

He said if the imported prices drop in the future as China's demand will possibly shrink, China's steel makers may face losses again.

"Therefore the domestic ore developers should be more innovative in technology research and management to lower the costs. That means a great deal in sharpening its competitiveness," Wang said.