Chinese Miner Quits WA Project, End of the World for Australia’s Iron Ore Sector?

Australia's mining sector would likely be in a gloomy mood on Friday, Dec 21, 2012. However, the cause of the downcast outlook is not because the miners believe in the Mayan forecast that the world would end that day, but over the pull out of a major Chinese investor in a resource project in Western Australia.

The Metallurgical Corporation of China said on Thursday that it would shelve its $3 billion iron ore project in Western Australia, the Cape Lambert iron ore venture, due to rising costs. The Chinese miner bought the project from Perth businessman Tony Sage in 2008 for $400 million.

The company will also pull out its staff out of Perth in preparation for the closing of its office in January 2013. Only five staff would be left behind, and they would transfer to a smaller location with the main task of maintaining Metallurgical's Australian mining licence.

Other resource projects also affected by the rising cost of operations in Australia include the $8-billion Citic Pacific Sino Iron Project which in 2006 was estimated to cost only $2.5 billion. Metallurgical is the same contractor for the Citic venture.

An analyst of a major steel industry research company in China said Metallurgical's pullout was not surprising because of the continuous rise in overall development cost, compounded by not being allowed to import Chinese workers.

In mid-2011, massive delays and cost overruns at the Oakajee port and rail development project caused Sinosteel to place on hold its $2-billion Weld Range project at the WA Midwest region. Also affected by a cost blowout was Gindalbie Metals's joint venture with Ansteel of China.

These developments had made the Chinese companies more cautious in investing in iron ore assets overseas.

It is not only Chinese but also Japanese miners that are pulling out of iron ore projects in Australia, particularly Mitsubishi Corporation, due to the dropping iron ore prices in the global market and delays in the Oakajee project.

Despite these developments, it is not doomsday yet for Australia's iron ore sector. The Financial Times reported on Thursday that share prices of major iron ore miners, including Vale, Rio Tinto and BHP Billiton, have risen to a near one-year high after it rallied 50 per cent from a low in early September.

The boost was caused by new investments on the mining sector amid indicators of improvement in Chinese activity and expected rise in demand for the key steelmaking ingredient.

FT reported that iron ore benchmark prices jumped to a five-month high of $137.25 a tonne from $88 in early September.