Europe Iron Ore: Fading Northern Lights

BMI View: I ron ore mining in Europe i s set to struggle over the coming years due to lower global iron ore prices and weak European demand for the metal. We expect the Eastern players, Russia and Ukraine, to maintain their dominance of the iron ore market, while the Nordics fail to increase their market share despite the promise of recent years . We forecast fast growth in iron ore production from Turkey on the back of strong demand from the country's growing steel industry and a number of impressive projects proposed by key players.

Iron ore mining in Europe is set to stagnate in coming years as weak global demand and booming supply precipitate prolonged decline in iron ore prices , disincentivising further investment in the sector . We forecast iron ore prices to decline from their recent peak in 2011 of on average US$176/tonne to US$90/tonne in 2017. For the next few years we expect the status quo of European iron ore production to remain. We anticipate slow growth in output from the largest European producers, Russia and Ukraine. Russia will grow on average 2.5% and Ukraine 2.1% y-o-y between 2012 and 2017, accounting for the vast bulk of incremental ore production. Output growth in Kazakhstan will be modest at around 2.5% y-o-y between 2013 and 2017.

Russia & Ukraine Take Lion's Share
Europe - Iron Ore Production By Country 2012 (mnt)

Northern Lights Fading

Elevated prices during the late 2000s created opportunities for other European iron ore miners, particularly the Nordics, to expand production and capitalize on strong Chinese demand boosting prices. Between 2008 and 2010, Norwegian iron ore output leapt over 300% from 0.7mnt in 2008 to 3.3mnt in 2010. However, we anticipate that weakening iron ore prices will hold back growth in the years to come. Between 2010 and 2012, Norway's iron ore output declined 22.5% from 3.3mnt to 2.5mnt. As iron ore prices continue to head south, we expect year-on-year stagnation in output to be the dominant trend for the country's iron ore sector.

Weaker Prices Ahead
Iron Ore Prices & % Change

Our outlook for stagnant growth is also applicable to the Swedish iron ore sector. We forecast growth to average 1.0% y-o-y from 2012 to 2017, with 2017 output reaching 27.3mnt. Swedish iron ore production is ten times larger than Norwegian. The Swedish industry has undergone strong growth since the mid-2000s, but has not seen the stellar growth rate seen in the Norwegian industry, due to growth from a larger base. Swedish iron ore output grew on average 4.0% y-o-y from 22.3mnt in 2004 to a peak of 26.2mnt in 2011. From 2011 to 2012, output fell 0.9% to 25.9mnt and we believe that this constitutes the beginning of a trend of stagnation in Swedish iron ore production.

Driving this small growth figure will be a number of projects which are due to come online within the Swedish iron ore sector. The country's largest iron ore miner, LKAB, intends to reactivate the Leveäniemi mine and start production at Mertainen in order to reach its target of 37mnt of iron ore deliveries by 2015. Considering the downturn in iron ore prices, weak European demand and the cost implications of reaching other potential trade partners, we expect LKAB to fall short of their production targets. It is likely that the company's expansion projects will fail to reach full capacity during this period of lower metal prices and this explains our modest 1.0% growth rate figure for the country's iron ore output. An upside risk to our forecast is that LKAB forges ahead with production growth on the back of contracts secured with new, extra-European partners. In Q313 LKAB signed an agreement with US steelmaker Nucor to supply 750ktpa of direct reduction pellet.

Volume Growth In The East
Europe - Incremental Iron Ore Production Growth

Scandinavian iron ore miners will face difficult times ahead, paving the way for increased consolidation as junior miners go under. One of the region's best-known new iron ore miners, Northland Resources, filed for bankruptcy protection in Q113. This case highlights the impact of weaker iron ore prices on smaller enterprises and we expect it to act as a deterrent to future mining companies considering investment in the Nordic iron ore sector.

Iron Ore - New Projects
Company Country Mine/ Project Size of deposit/ Production Forecast
Source: BMI, Company Profiles
LKAB Sweden Leveäniemi 110 mnt reserves
LKAB Sweden Mertainen 10-15 mntpa
MaxOre Turkey Kuluncak 20mnt reserves
Erdemir Madencilik & subsidiaries Turkey *Replacement projects for depleted Sivas mine 1bnt reserves
Alrosa & Evraz Russia Timir Resource base of 3.5bnt
Black Iron & Metinvest Ukraine Shymanivske and Zelenivske Resources of 646mnt

Turkey To Outperform

While the outlook for growth in the Nordics is weak, we expect Turkish iron ore output to continue on its strong trajectory and exhibit one of the strongest growth rates in Europe, albeit from a low base . Growth averaged 9.2% y-o- y from 3.4mnt in 2003 to 6.8mnt in 2012 , and we forecast growth to average 5.5% y-o-y from 2012 to 8.9mnt in 2017 . We expect strong growth in Turkish steel production as well as government support to encourage growth in iron ore mine production. Iron ore production in Turkey is dominated by Erdemir Madencilik , a subsidiary of Erdemir , the country's largest producer of steel flats . Erdemir Madencilik owns 80% of Turkey's proven iron ore reserves. The company has embarked upon a project to tap new iron ore deposits estimated at 1 billion metric tons in the central province of Malatya, as reserves at its Sivas plant will be depleted by 2016 . In Q213 Erdemir Madencilik received a government subsidy of US$827.7mn for investment in its new iron ore plant. Other projects include MaxOre's Kuluncak project with resources of around 20mnt. Consequently, despite weak global prices making iron ore imports cheaper, we expect growth to continue in Turkish iron ore production, albeit at a slower rate .

Major European Producers - Iron Ore Production (mnt)
2008 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f
f= forecast. Source: BMI, WBMS
Russia 100.0 92.0 101.0 100.0 104.0 106.5 109.1 111.8 114.7 117.4
Ukraine 73.0 66.0 78.0 80.0 82.2 83.8 85.5 87.2 89.0 90.7
Kazakhstan 23.0 22.3 24.0 24.7 26.0 26.6 27.6 28.3 28.9 29.4
Sweden 24.8 17.7 25.3 26.2 25.9 26.2 26.4 26.8 27.5 28.2
Turkey 4.0 4.4 5.4 5.8 6.8 7.2 7.6 8.0 8.5 8.9
This article is tagged to:
Sector: Mining
Geography: Europe, Kazakhstan, Norway, Russia, Sweden, Turkey, Ukraine