Despite slowing demand from China, the long-term demand outlook for iron-ore was not bleak, global commodity industry pricing and market analysis firm CRU consultant Serafino Capoferri told delegates at the fourth Africa Iron Ore conference, in Johannesburg, on Tuesday.
Chinese steel consumption was expected to continue growing in the years ahead, peaking around 2020, despite the slower growth rate, he said, adding that demand for iron-ore from other emerging economies, particularly India, was expected to outstrip that of China after 2020.
Capoferri further noted that while demand for iron-ore was expected to grow, supply would likely grow even faster. This meant that not all of the iron-ore supplies would be needed to meet demand in the long term and it was, therefore, estimated that only about 40% of the iron-ore projects currently under development would be needed to meet future demand.
Long-term iron-ore prices were therefore expected to fall.
In an environment with low prices, West Africa’s competitive strength, from a cost perspective, lies in its low mining and processing costs, which were a function of high in situ grades and low strip ratios.
Compared with Australia's iron-ore mining sector, where Capoferri expected to see a fall in in situ iron grade, projects in West Africa were expected to experience an increase in situ iron grade going forward.
West African projects also had weighted average strip ratios far below the world average, giving them more of a competitive edge, he pointed out.
Capoferri highlighted that while West Africa’s was competitive in terms of its low mining and processing costs and low strip ratio, the area’s competitiveness was lost at a logistics level, as the largest projects and highest iron grade operations were often the furthest away from the port.
“Logistics does not only affect the cost of transporting iron-ore from the mine to port, it also increases the unit costs of labour, consumables and diesel, besides others and has a wider impact on the cost structure of a mine,” he noted.
Capoferri believed that while West Africa performed well at an in situ cost level and gained competitiveness against Australia when quality was taken into account, the area's freight costs pushed it up on the business cost curve.
Meanwhile, Capoferri noted that, when evaluating the risk/reward balance for prospective West Africa projects, the more capital intensive a project was, the more investment it required and the the higher the risk of it destroying shareholder value.
“What we noted in West Africa, especially in the face of the region rising as a potential iron-ore supplier in times when the iron-ore price was strong, many projects approaching the market with feasibility studies [indicating] high capital costs but low operating costs, were in a way trying to imitate what was successful in the Pilbara mining region in Western Australia, where economies of scale really drove the competitiveness of these operations.
“Our view, however, is that projects similar to this are not efficient from a [risk/reward] perspective as all of them faced the challenges of delays and struggling to obtain financing from investors.”
Capoferri suggested instead that the value of those projects be increased by reducing the capital costs they required, even if it implied higher operating costs.
Therefore, from a risk/reward perspective, the smaller operations were often of higher value in a region characterised by higher marginal costs of capital, he said.
 

• [Editor:Sophie]