Asia’s richest woman looks past China to beat iron ore gloom

Melbourne: Asia-Pacific’s richest woman is gearing up to start shipments from her $10 billion iron ore project in Australia. Even with prices at 10-year lows, she’s displaying no lack of confidence in the mine’s success.

Billionaire Gina Rinehart’s ace? Her mine isn’t relying solely on sales to China, the biggest iron ore buyer. This limits the project’s exposure to a market where steel demand is judged to be peaking.

Instead, she’s locked in supply contracts with three of the largest iron ore consuming Asian nations outside of China.

“They feel very confident. Roy Hill has a massive advantage in that it has diversified its markets,” Philip Kirchlechner, Perth-based director of Iron Ore Research Pty. said by phone. “They have buyers from three of the other major iron ore importing markets.”

Roy Hill, Australia’s largest single iron ore mine, is on track to commence exports from September, adding 55 million tons a year of output to a market already saturated by a growing surplus. It’s even accelerating the mine’s schedule, seeking to hit its planned capacity at the fastest pace of any project built in Western Australia’s iron-rich Pilbara region.

Posco, Marubeni

Her partners, South Korea’s Posco, Japan’s Marubeni Corp. and Taiwan’s China Steel Corp. have committed to take half of the mine’s annual output, Barry Fitzgerald, chief executive officer of Roy Hill Holdings Pty, said in an e-mailed response to questions. “We also have significant commitments from steel mills across Asia for a large portion of the remaining sales volume,” he said.

Posco, which has a 12.5% stake, expects to begin importing about 7 million metric tons annually from Roy Hill in September, Kang Min Suk, a spokesman at Posco, said by phone on Wednesday. South Korea’s biggest steelmaker rose 2.6% to 253,000 won in local trading, trimming its decline this year to 8.2%.

The mine’s products “are in demand by steel mills, no matter what the pricing environment,” Fitzgerald said.

Rinehart, with an estimated wealth of about $12.1 billion according to the Bloomberg Billionaires Index, sold a 30% stake in Roy Hill to the three partners.

“In an environment like now where it’s quite risky and there are buyers defaulting, it’s good to have reliable offtakers,” said Kirchlechner, formerly head of marketing at Fortescue Metals Group Ltd. and an ex-Rio Tinto Group executive in China.

Rinehart’s judgment on iron ore follows her acute call on thermal coal, agreeing to sell most of her assets in 2011 for $1.26 billion. The fuel fell in 2012 to its worst annual price slump in seven years.

Quarterly loss

Iron ore prices had the largest quarterly loss since 2009 in the three months through March and plunged to a decade low of $47.08 a dry metric ton last week, before climbing back to $48.06 on Tuesday, according to Metal Bulletin Ltd. data. Last week’s level was the lowest since 2004-2005 based on the data and on annual benchmarks compiled by Clarkson Plc, the world’s largest shipbroker. The plunge prompted junior miner Atlas Iron Ltd. to suspend its shares from trading on Tuesday while it reviews its operations and considers asset sales.

A forecast global surplus means those developing new mine projects face sharp revisions to revenue estimates, said Andrew Hodge, a Sydney-based analyst at Wood Mackenzie Ltd. “Undoubtedly you are going to have lower revenues and lower margins than they anticipated,” Hodge said by phone.

Cheaper labor

Building Roy Hill after large competitors completed a $120 billion program of expansions may mean the mine has benefited from cheaper labor and contract rates. Staffing costs on some projects are about 20% lower amid weaker competition for labor, Hodge said.

The exit of higher cost production will probably see the iron ore market return to balance by 2023, according to Wood Mackenzie. Prices may rise from next year, the China Iron & Steel Association forecasts.

“Through history, the best returns are generally built during the downtown,” said Carl Adams, Perth-based national sector leader for mining at KPMG. “You could argue that Gina Rinehart has built in the downturn and that she’s poised for the upside.” Bloomberg

Heesu Lee in Seoul contributed to this story