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Oct 11, 2007

Iron ore boom is just getting started

Iron ore prices have been the invisible driver of much of the China boom since 2004 in this country as that country's steel industry has grown. While copper has attracted much of the interest, boring WA dirt has been the sleeper, writes Glenn Dyer.

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Australia has had oil booms, copper booms, nickel booms (including the Poseidon boom), a tech boom in the 1990s, and of course endless property speculations. We’ve even had a coal boom or two. But an iron ore boom?

Iron ore prices have been the invisible driver of much of the China boom since 2004 in this country as that country’s steel industry has grown. Copper has attracted much of the interest, along with nickel and uranium.

Boring WA dirt has been the sleeper, rich in iron of course, but dirt all the same. A surging local currency and sliding US dollar have helped while recently there have been suggestions of a 30% rise in the 2008 iron ore price due to tight market conditions. The negotiations haven’t started yet.

BHP, Rio and Brazil’s CVRD usually start the negotiations in Japan, which then sets prices for the rest of the world. But will the talks start with China in a signal of the changing power structure?

We won’t know for a month, but there’s a lot of face riding on the decision. The Chinese want the Australians and CVRD to pick them but they know prices are going to have to rise sharply. The $1 billion merger idea between Murchison and Midwest could be a part of that. Don’t discount a deep pocketed Chinese player like Sinosteel or an ally launching a corporate play of its own.

Because both Murchison and Midwest have their mines and prospective expansion plans based in the midwest region of WA, inland of Geraldton, and the State Government says there will only be one port and railway line, it makes sense for the two to combine.

Murchison has been trying to get merger talks going with Midwest for some months but the Malaysian interests that have a substantial shareholding, but not outright control, won’t play.

Midwest’s two tier, near $1 billion, all paper offer was launched yesterday a couple of days after the WA Government explained the facts of life on the infrastructure. The Government said Monday that it was calling a limited tender to build the midwest region’s infrastructure and was inviting only Murchison and Midwest or their nominees to apply.

Both companies are fearful that if one controls the railroad and port, or if one controls the port and the other the railroad, then there will be confusion and suspicion: the WA Government believes this to be the case from public comments by ministers.

It makes sense for both companies to merge: but will the Chinese and Japanese buyers allow that to happen?

Japanese raw material consumers and their trading house allies are bitter rivals with the rapidly emerging Chinese steel and other metal industries, and the growing group of trading companies servicing them.

Midwest is backed by Sinosteel of China and the Chinese backed Yilgarn Infrastructure group is also in its corner. Murchison is backed by the big Mitsubishi trading house from Japan and the big South Korean steel maker, Posco, owns an 11% stake. So it is a classic old v new showdown: Japanese steel companies have long been major players in the WA iron ore industry.

So it makes sense for both Japanese and Chinese interests to try and stake a claim in the midwest area where there are substantial lower grade deposits of iron (magnetite in many cases upgradeable to pellets) and high quality hematite, which is in big demand in China, Japan and Korea.

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