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Under-supplied Middle East iron ore market whets high-grade appetite

The Middle East is shaping up as a niche and "badly underserviced" prize for aspiring Australian high-grade iron ore producers amid evolving changes in China's market, but the high CapEx costs of developing such pelletization projects could see the big boys muscle in ahead of them.

Carpentaria Resources Ltd., which just rebranded from Carpentaria Exploration to reflect its shift to development stage for its flagship Hawsons high-grade iron ore project in New South Wales, believes the Middle East is a "badly underserviced" niche play ripe for his company to tap.

"It doesn't get spoken about very often at all, but the Middle East's direct reduction iron [DRI] market needs a super-grade feed with less than 3% silica and alumina, and there are only around 10 projects in the world that can produce that," Carpentaria managing director Quentin Hill told S&P Global Market Intelligence.

Lack of supply feed is currently constraining growth in DRI — the most efficient way to make iron from raw materials is using gas instead of coal to reduce the iron ore — and Carpentaria is in discussions with DRI users in the region, as it has what Hill calls the world's leading undeveloped DRI pellet feed project.

However, Vale SA largely controls that market which therefore needs new, independent and diverse sources of supply.

Hill believes the fact that it is such a difficult specification to meet, with very few projects and products which can meet it, plays into Carpentaria's strengths, being one of the very few proposing to build a new DRI feed project.

Carpentaria already has the region's DRI market, represented by Emirates Steel Industries, Bahrain Steel BSCC and Kuwait Steel which have signed non-binding letters of intent over the past two years to buy about half of the junior's production.

Though that investment story looks good as DRI pellet feed is the highest-value market in the world, Carpentaria faces a big task as funding will be needed to cover project CapEx which Breakaway Research estimates to be between A$1.5 billion and A$1.7 billion, after a definitive feasibility study likely to cost up to A$30 million.

However, Carpentaria also has its sights set on other pelletizers and traders including Formosa Plastics Corp. which is building steel making facilities in Vietnam, and Shagang Iron and Steel Group, which has China's largest private steel mill, and which Hill says has 2.5 million tonnes of spare pelletizing capacity.

"There is lots of pelletizing capacity as [those companies] built them knowing where the government wanted to take the industry, and now the industry is there they need the pellet feed," he said.

S&P Global Market Intelligence senior metals and mining commodity analyst Max Court said in an interview that Carpentaria's product would "perform very well" being of 70% grade and that DRI was still on an upward trajectory.

"Blast furnace pelletization in China has come under a bit of fire due to environmental problems because it's an emissions intensive industry, so lots of that is being done overseas," he said.

"The reason you do DRI in the Middle East and India is because you don't have any coking coal. You need that in order to go down the blast furnace route of production."

Court said Saudi Arabia's new crown prince, Mohammed bin Salman, needs to grow the country's steel industry "pretty quickly" as he wants to spend up big to improve infrastructure and generate jobs, and given that importing coking coal is difficult being a constrained market, DRI pellets will get a boost from that.

"Vale has a pelletizing plant in Oman that takes half of 6 million tonne production per year, and imports from Vale's Brazilian operations and the Iron Ore Co. of Canada Inc. in Canada, so there could be a great growth story out of that for the DRI guys," Court said.

"However, it's difficult to see a lot of DRI volume growth because it’s tough to make the pellets. It's very capital intensive, you're looking at over $100/tonne CapEx.

"When you have the majors like Rio Tinto being able to put out material from sustaining operations in Koodaideri South and Silvergrass which are US$35/tonne in terms of CapEx intensity, it's a lot cheaper to start putting in a lot more Pilbara Blend and BHP Billiton Group-type product than it is to make all of these DRI pellets as Carpentaria described."