Petropavlovsk , the recently-renamed Peter Hambro Mining , surprised the market when it announced a joint venture with privately-owned Chinese concern XY-Group to develop its iron ore deposits in Russia's Jewish Autonomous Region, on China's northern border.
Many had presumed these assets, acquired with the absorption of Aricom in April, were not a near-term priority for gold-focused Petropavlovsk. However the new deal, under which XY will provide at least $263m to the $375m development of a 3.2m tonnes per year operation and buy all output, could see production from 2012, sooner than previously expected. Analysts duly scrambled to upgrade valuations.
The deal underscores Chinese interest in securing long-term supplies of iron ore. Yet what kind of pricing environment will such projects be selling into? September saw a resurgence of iron ore imports into China, notching a new monthly record of 65m tonnes compared to some 50m tonnes in August. Such metrics are evidence to mining bulls that despite the global economic slowdown, the seaborne iron ore business dominated by Rio Tinto and BHP Billiton and defined by Chinese demand remains impervious to slowdown. Certainly, Chinese appetite has been instrumental in Rio Tinto just announcing a new quarterly record for iron ore production and upping its full-year output forecast.
Yet, as with other commodities enjoying a Chinese import frenzy this year, actual real demand is considerably weaker. The China Iron & Steel Association (CISA) says that year-to-date ore imports of 405m tonnes have exceeded demand by 50m tonnes, and that speculation is the reason for Chinese ore prices now hovering around $90 per tonne.
Moreover, the ore is in turn feeding a Chinese steel industry obviously stricken with overcapacity, which has been producing far more steel than required domestically. This rampant overproduction is now depressing prices and threatening an almighty dumping into the global steel market. As such, CISA has also warned that global iron ore supply will exceed demand next year.
