For much of the past decade, Asian investors spent billions of dollars on iron ore deposits in the Australian outback in an attempt to break BHP Billiton and Rio Tinto’s stranglehold on the commodity. They bet on the wrong type of iron ore.
Companies including China's Ansteel Mining and Japan's Mitsubishi have halted or scaled back ambitious plans to open up a new mining hub in Western Australia targeting a low-grade ore known as magnetite. Magnetite is more costly to produce than hematite, the type of ore typically found at BHP's and Rio Tinto's mines.
When worries about a global shortfall in iron-ore supply drove prices of the commodity to a peak above US$190 a tonne in 2011, magnetite looked attractive. Much of the Asian investment flowed into Western Australia, estimated to contain 13 billion tonnes of magnetite ore -- enough to meet Chinese demand for around a decade at current rates.
But a fall in iron ore prices to a five-year low below $US83 a tonne is threatening those investments. The most-prominent example of a loss-making magnetite mine is the $US10 billion Sino Iron project in Western Australia developed by Citic Pacific --recently renamed Citic Ltd -- which started up last year.
China's Sinosteel Corp hoped to produce magnetite from the Koolanooka deposit acquired through its $A1.36bn hostile takeover of Midwest Corp in 2008, but progress has been slow.
One thing Asian investors failed to reckon with is the aggressive response of the world's biggest iron ore miners, which have been ramping up output of more profitable hematite ore in Australia's Pilbara region where they have enormous efficiencies of scale. That has triggered concerns about a global glut of iron ore that will take years to clear.
"The future of new magnetite projects in Australia is no longer clear," said Daniel Morgan, a Sydney-based analyst at UBS. "There's a lot of hematite coming into the market, and it can come quicker and at a lower cost."
Magnetite is more common than the hematite that comprises much of the global trade in iron ore, and contains a purer form of iron. But magnetite has a major drawback: The iron tends to be found in thin layers in the earth's crust. That means there is less mineral and more waste rock in what's extracted: magnetite has less than 50 per cent iron content compared with typically more than 60 per cent in hematite.
High-grade hematite -- a reddish colour material -- is often referred to as "direct shipping ore" because of the minimal amount of processing needed before it is loaded on massive ships bound for the blast furnaces of Asian steel mills. In contrast, magnetite -- a black, highly magnetic mineral -- requires expensive infrastructure such as crushers and concentrators to turn it into a material that steelmakers can use.
Already, some Asian magnetite mining ventures have found it impossible to stay afloat. In June, IMX Resources -- which counts China's Sichuan Taifeng Group as a major shareholder -- said it would shutter its majority-owned Cairn Hill mine in South Australia, which produces magnetite and copper, because of falling iron-ore prices. The company this week also sold its Mt Woods magnetite deposit to focus on nickel, graphite and gold exploration in Tanzania instead.
The pullback is especially evident in Western Australia. Three years ago, a Deloitte Access Economics report forecast the state would receive the lion's share of a boost to Australia's economy from the magnetite push, estimated at $A4.5bn in revenue and 4,000 jobs.
Now, many of the biggest magnetite developments in Western Australia are on hold. Japan's Mitsubishi Corp, which as recently as 2012 bought out its joint venture partner in the Jack Hills mine and Oakajee port and rail project for $A325 million, said both projects are delayed indefinitely.
"We think Jack Hills is a good asset, but this isn't a good time to proceed," a Mitsubishi spokeswoman said. "Iron-ore prices are not good."
Last month, Gindalbie Metals Ltd. said it would write down the value of its Karara Mining Ltd. venture with China's Ansteel by $A640m, citing the slump in iron-ore prices as a major reason. That followed Gindalbie's move six months earlier to hand majority ownership of Karara Mining to Ansteel as part of a $A60 million fundraising, after its auditors raised concerns about its ability to stay solvent.
UBS estimates Gindalbie needs an iron-ore price of $US100 a tonne to break even -- double that for Rio Tinto and BHP. Spokespeople for Ansteel and Gindalbie declined to comment.
Analysts say Asian companies aren't likely to dump their magnetite investments even if they are running at a loss, as executives remain concerned about the dominance of a handful of iron-ore miners. Global output by the top five producers -- Vale SA, BHP, Rio Tinto, Anglo American PLC and Fortescue Metals Group -- is expected to rise more than 40 per cent to over 1.5 billion tonnes by 2017.
"We expect mills will be extremely reluctant to raise their reliance on the major producers," said Ian Roper, a resources analyst at CLSA.
Mitsubishi says it isn't giving up on magnetite, since the material has fewer impurities than hematite, and so can make high-quality steel.
High-cost magnetite variety looked attractive amid possible shortfall for steel ingredient until prices declined.
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