The bank’s loftier assumptions for coal and iron ore reflect rising capital and operating costs at a time of demand-led market growth from the BRIC (Brazil, Russia, India and China) economies, it says.
“On a 10-year plus view we believe emerging market demand will remain sufficiently robust to necessitate the development of more challenging (and-or lower grade) deposits,” the broker said.
Often these deposits will be in higher risk locations, and entail “significant infrastructure related investment and-or associated
energy intensive beneficiation”
The latter includes several big-ticket Australian magnetite projects that, up to now, have played second fiddle to direct ship projects such as Fortescue Metals Group’s new Pilbara venture.
The broker lifted its long-term price (defined as its best estimate of the mid-cycle commodity price likely to occur between 5-20 years out) for lump iron ore by 36% and 16% for fines.
It now expects lump prices to average US24c (A25.6c) per dry metric tonne unit, up from 18c previously.
If GSJBW is right (and admittedly it will take up to 10 years to find out), Australia’s Pilbara and Mid West magnetites will eventually find a home as traditional high-grade DSO material peters out.
The broker’s call is also timely for Rio Tinto, which had egg splattered over its face yesterday by the Guinea Government querying Rio’s tenure over the $US6 billion Simandou DSO project.
It was a timely reminder that, no matter how good the deposit, sovereign risk is always ready to rear its ugly head in certain African countries.
Yet Rio will do well to work through the political minefield, based on GSJBW’s view of the market.
The broker says that some West African and Indian projects, which suffer high capital costs (and also carry a high country risk premium) “will need to be developed over the next 10-20 years in order to balance the seaborne market”
If not, the market will be tipped into shortage by demand growth in the BRIC (Brazil, Russia, India China) economies, particularly China.
The latter’s domestic supply of iron ore is deteriorating rapidly and “will increasingly lag the requirements of the domestic steel industry”, the broker reckons.
“Indeed, we estimate that China’s import dependency for iron ore will rise to around 70 percent by 2015 versus an estimated 57 percent this year.”
Assuming that the 8% trend growth in global demand for seaborne iron ore is sustainable through to 2012, and 6% growth thereafter, “the world will require an additional 500 million tonnes of iron ore export supply by 2015 and more than an additional 1 billion tonnes by 2020!”
GSJBW lifted its metallurgical coal price forecasts by 16-23%, depending on the category, while thermal coal is up 23%.
