b1311 iron ore mining in australia industry report (1)

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2 About this Industry 2 Industry Definition 2 Main Activities 2 Similar Industries 2 Additional Resources 3 Industry at a Glance 4 Industry Performance 4 Executive Summary 4 Key External Drivers 5 Current Performance 7 Industry Outlook 10 Industry Life Cycle 12 Products & Markets 12 Supply Chain 12 Products & Services 13 Demand Determinants 13 Major Markets 14 International Trade 15 Business Locations 17 Competitive Landscape 17 Market Share Concentration 17 Key Success Factors 17 Cost Structure Benchmarks 18 Basis of Competition 18 Barriers to Entry 19 Industry Globalisation 20 Major Companies 20 Rio Tinto Plc – Rio Tinto Limited 22 BHP Billiton Limited 23 Fortescue Metals Group Limited 25 Operating Conditions 25 Capital Intensity 26 Technology & Systems 26 Revenue Volatility 26 Regulation & Policy 27 Industry Assistance 28 Key Statistics 28 Industry Data 28 Annual Change 28 Key Ratios 29 Jargon & Glossary IBISWorld Industry Report B1311 Iron Ore Mining in Australia August 2011 Edward Butler Revenue boom: Increased output meets strong demand in export markets www.ibisworld.com.au | (03) 9655 3881 | [email protected]

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Page 1: B1311 Iron Ore Mining in Australia Industry Report (1)

2 About this Industry2 Industry Definition

2 Main Activities

2 Similar Industries

2 Additional Resources

3 Industry at a Glance

4 Industry Performance4 Executive Summary

4 Key External Drivers

5 Current Performance

7 Industry Outlook

10 Industry Life Cycle

12 Products & Markets12 Supply Chain

12 Products & Services

13 Demand Determinants

13 Major Markets

14 International Trade

15 Business Locations

17 Competitive Landscape17 Market Share Concentration

17 Key Success Factors

17 Cost Structure Benchmarks

18 Basis of Competition

18 Barriers to Entry

19 Industry Globalisation

20 Major Companies20 Rio Tinto Plc – Rio Tinto Limited

22 BHP Billiton Limited

23 Fortescue Metals Group Limited

25 Operating Conditions25 Capital Intensity

26 Technology & Systems

26 Revenue Volatility

26 Regulation & Policy

27 Industry Assistance

28 Key Statistics28 Industry Data

28 Annual Change

28 Key Ratios

29 Jargon & Glossary

IBISWorld Industry Report B1311Iron Ore Mining in AustraliaAugust 2011 Edward Butler

Revenue boom: Increased output meets strong demand in export markets

www.ibisworld.com.au | (03) 9655 3881 | [email protected]

Page 2: B1311 Iron Ore Mining in Australia Industry Report (1)

www.IBISwOrLd.COM.Au Iron Ore Mining in Australia August 2011 2

Firms in this industry mine iron ore. The main type of ore mined is haematite.

The primary activities of this industry are

Iron ore dressing or beneficiating

Iron ore mining

Iron sands mining

Industry definition

Main Activities

Similar Industries

Additional resources

IBISWorld writes over 500 Australian industry reports, which are updated up to four times a year. To see all reports, go to www.ibisworld.com.au

The major products and services in this industry are

Iron ore fines

Iron ore pellets

Lump ore

About this Industry

B1312 Bauxite Mining in AustraliaCompanies in this industry mine bauxite and aluminium ore.

B1313 Copper Ore Mining in AustraliaBusinesses in this industry mine copper ore.

B1314 Gold Ore Mining in AustraliaEstablishments in this industry mine gold-bearing ore and process it into gold bullion.

B1315 Mineral Sand Mining in AustraliaEnterprises in this industry mine mineral sands including zircon, ilmenite, rutile and leucoxene.

B1316 Nickel Ore Mining in AustraliaCompanies in this industry mine nickel ores including sulphide and lateritic ore.

For additional information on this industry

www.abares.gov.au Australian Bureau of Agricultural and Resource Economics and Sciences

www.australianminesatlas.gov.au Australian Mines Atlas

www.minerals.org.au Minerals Council of Australia

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Market ShareRio Tinto Plc – Rio Tinto Limited 41.0%

BHP Billiton Limited 37.0%

Fortescue Metals Group Limited 10.0%

Key External driversworld price of iron oreworld demand for steelTrade-weighted indexdemand from iron and steel manufacturing

Key Statistics Snapshot

Industry at a GlanceIron Ore Mining in 2011-12

revenue

$56.6bnProfit

$25.5bnExports

$52.4bnBusinesses

20

Annual Growth 12-17

4.3%Annual Growth 07-12

23.7%

Industry Structure Life Cycle Stage Growth

Revenue Volatility Very High

Capital Intensity High

Industry Assistance Low

Concentration Level High

Regulation Level Heavy

Technology Change Medium

Barriers to Entry High

Industry Globalisation High

Competition Level High

FOR ADDITIOnAL STATISTICS AnD TIME SERIES SEE THE APPEnDIx On PAGE 28

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World price of iron ore

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% c

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Revenue Employment

Revenue vs. employment growth

Iron ore production

96.8%WA

2.5%SA

0.7%TAS

SOURCE: WWW.IBISWORLD.COM.AU

p. 20

p. 4

SOURCE: WWW.IBISWORLD.COM.AU

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Key External drivers Trade-weighted indexThe value of the Australian dollar against the US dollar and the US dollar price for iron ore play key roles in determining the Australian dollar earnings of iron ore producers.

World price of iron oreThe US dollar price for iron ore depends on the balance between demand and supply in the marketplace. When the iron ore price grows, so too will the value of iron ore mined by this industry.

Demand from iron and steel manufacturingThe level of steel production worldwide is a key determinant of the demand for iron ore. When demand for items made of iron is high, miners in this industry will experience sales growth.

World demand for steelThe level of steel production worldwide directly affects demand for iron ore. When steel is in high demand, iron ore miners will experience more sales.

Executive Summary

The Iron Ore Mining industry is expected to generate revenue of $56.6 billion in 2011-12, compared with $19.6 billion in 2006-07. Industry revenue is expected to grow by 10.2% in 2011-12, building on the 38.7% gain made in the previous year. Growing iron ore output and higher prices have underpinned the increases in industry revenue. Profit is also expected to expand strongly, reaching $25.6 billion in 2011-12. Higher iron ore prices in 2011-12 and 2010-11 follow a drop in the previous year that was induced by the

global financial crisis. The industry is expected to account for 2.6% of Australia’s GDP in 2011-12. Over the five years through 2011-12, industry revenue is expected to grow by 23.7% per annum. Strong economic growth in large emerging nations, such as China and India, is driving demand for iron ore and underpinning price rises.

Australia’s iron ore production is forecast to total 470.0 million tonnes in 2011-12, compared with 287.7 million tonnes in 2006-07. About 435.0 million tonnes of iron ore valued at $52.4 billion

will be exported, with nearly all sales going to China, Japan, South Korea and Taiwan. Australia will import some iron ore, mainly from India. The industry will employ about 9,900 people in 2011-12, paying wages amounting to $1.7 billion. There are 29 establishments and 20 enterprises involved in the industry.

Industry performance is expected to expand more slowly over the five years through 2016-17, as higher production levels offset somewhat lower Australian dollar iron ore prices. Increases in iron ore output worldwide (a response to recent high prices and strong demand) are expected to put downward pressure on prices. As a result, industry revenue is expected to grow at a slower rate of 4.3% per annum over the next five years, pushing revenue up to $69.9 billion by 2016-17. The Federal Government plans to impose a Mineral Resource Rent Tax on iron ore and coal from 1 July 2012. A headline tax rate of 30.0% will be imposed on profit after a return equal to the long-term government bond rate plus 7.0%. Firms will also gain a tax credit for royalties paid to state governments. Carbon pricing, initially in the form of a carbon tax, will be introduced on the same date. Mining firms’ use of fuel will incur the tax, which will be implemented via reductions in currently available fuel tax credits.

Industry PerformanceExecutive Summary | Key External drivers | Current Performance Industry Outlook | Life Cycle Stage

Strong growth in emerging nations is driving demand and underpinning price rises

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Industry Performance

Current Performance

Demand for iron ore is closely tied to steel production and indirectly related to trends in economic growth that drive global demand for steel. The key steel-using industries worldwide are construction, motor vehicle manufacturing, shipbuilding, plant and equipment manufacturing and consumer goods manufacturing. Strong economic growth is typically associated with high levels of activity in all or most of these industries and flows through to rising steel demand and output, and increased iron ore demand and production. The performance of Australia’s iron ore producers depends on the volume of iron ore produced, the iron ore price (set in US dollars) and the value of the Australian dollar. Together with Brazil, Australia is a major global supplier of iron ore. Production levels and prices are determined by the interplay of global demand for, and supply of, the mineral. Overall, industry revenue is expected to increase by 23.7% per annum over the five years through 2011-12, with profit growing at a similar rate. Revenue is expected to reach $56.6 billion in 2011-12, up by 10.2% from the previous year.

Australia’s iron ore production and exports are expected to be about 470.0 million tonnes and 435.0 million tonnes respectively in 2011-12. Output has grown dramatically over the past five years, from 287.7 million tonnes in 2006-07, and

exports have surged from 257.4 million tonnes. All of the increase has been directed at the Chinese market, where booming steel production is drawing in imports. The combination of higher output and rising prices is expected to push up revenue sharply and lead to large profit gains in 2011-12, although an even stronger performance was recorded in 2010-11, when iron ore prices soared. Revenue expanded by 38.7% that year. To a large extent, the higher prices in 2010-11 reflected a rebound in demand after the global financial crisis, but the price rise also reflected constrained availability. The state of Karnataka in India banned iron ore exports in July 2010, with the aim curbing illegal sales. Although the Indian Supreme Court ordered that the ban be lifted in April 2011, this has done little to ease supply constraints. The Indian Government quadrupled export duties (to 20.0% from March 2011) and increased freight rates for iron ore, making exporting a less attractive option. Iron ore prices dipped only briefly in the wake of the earthquake and tsunami that devastated sections of Japan’s eastern seaboard.

For more than four decades, contract prices for iron ore exports were set in annual negotiations between major steel producers in Japan and China, and major iron ore exporters in Australia and Brazil. A key drawback of the system, under

Key External driverscontinued

% c

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World demand for steel

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Industry Performance

Current Performancecontinued

which contract tonnages were also set, is that over the course of a year, prices on the spot market and contract prices can diverge markedly. In March 2010, BHP Billiton, the world’s third-largest miner of iron ore, announced that it had reached an agreement on quarterly iron ore export contracts with a significant number of its customers in Asia. In April, Vale and Rio Tinto each made similar

statements, with Vale noting that 90% of its iron ore sales were contracted under the new quarterly basis. The change in the contract system coincided with rapidly rising spot prices and yielded a near doubling of contract prices compared with the annual benchmark price set for 2009. Further changes may occur, as BHP Billiton and Rio Tinto push for monthly pricing.

Boom time The enormous revenue gain of 38.7% in 2010-11 followed a revenue slump of 10.4% in the previous year. The decline occurred as considerably lower US dollar iron ore prices and a marginally stronger Australian dollar (which led to an even larger price fall in local currency) more than offset higher output. Strong growth in industry revenue in 2008-09 disguised a marked deterioration in the market for iron ore. Steel demand and prices fell sharply in late 2008 as the global financial crisis dimmed growth prospects. Major developed economies moved into recession or teetered on its brink, affecting the growth prospects of developing countries such as China. Australian producers faced the prospect of substantial price cuts during iron ore negotiations for contracts commencing on 1 April 2009. That date came and went without price negotiations being concluded, but subsequent price cuts were agreed. Chinese steelmakers, still reeling from the large price increase of the previous year and facing lower steel prices, had sought price cuts of about 40%. However, the world’s three big iron ore miners, Rio Tinto Limited, BHP Billiton Limited and Brazil’s Vale, held out for smaller price cuts. Time proved to be on their side, and rising iron ore spot prices resulted in steel mills settling for a smaller 33% price cut.

Contract iron ore prices soared for the year commencing 1 April 2008. Tight market conditions, reflecting strong growth in steel production and hence in iron ore demand in a number of countries, resulted in tense and

protracted price talks. Negotiations between Vale and steelmakers from Asia and Europe resulted in an agreed price rise of 65% for most ore, commencing 1 April 2008. The Chinese steel producer Baosteel agreed to an even larger price rise (71%) for Vale’s premium Carajas ore. Rio Tinto and BHP Billiton, which were holding out for a price rise of 85%, settled contract iron ore prices much later than Vale. Iron ore output and exports were about 353 million tonnes and 323 million tonnes respectively in 2008-09. Higher output and much higher prices lifted revenue generated by Australia’s iron ore producers by nearly 67% in 2008-09, with a large part of that flowing through to profit.

Rising transport costs for Brazilian iron ore to Asia led to a large gap opening between the landed price of Brazilian iron ore and Australian iron ore, especially in key markets such as China. Australian producers negotiated hard to

% c

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Industry revenue

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Industry Performance

Industry Outlook

The performance of the Iron Ore Mining industry over the next five years will be heavily influenced by trends in steel demand and production, price negotiations with Japanese and Chinese

steel producers and the value of the Australian dollar. Australia’s production and exports of iron ore are expected to continue rising over the next five years. Firming global economic growth,

Boom timecontinued

capture some of the transport cost benefit associated with Australian iron ore. Negotiations with Chinese steelmakers continued until well into June 2008, and ultimately resulted in a price increase of 85% (backdated to 1 April 2008). Rio Tinto successfully argued that its iron ore should attract a premium over products from Brazil because of lower shipping costs to Asia. Despite buyer reluctance to agree to a higher price rise for iron ore from

Australia, there was considerable pressure to conclude a deal before the end of June. If no agreement had been reached by that date, provisions would have applied in the long-term contracts between iron ore producers and steel mills for sales to occur at spot prices until an agreement was reached. Given that spot prices for iron ore were well above the new contract price sought by Rio Tinto, there was considerable incentive for buyers to settle before that date.

New mines and demand

Contract negotiations between steel manufacturers and iron ore miners led to price rises for the year commencing 1 April 2007. In December 2006, Brazilian iron ore producer Companhia Vale do Rio Doce reached an agreement with the Shanghai-based Baosteel Group for a 10% increase in the price of iron ore fines. Shortly thereafter, Australian producers secured a 10% increase in prices for both iron ore fines and lump ore, making five consecutive annual price rises. Australia’s iron ore production and exports rose strongly in 2007-08, reaching 325 million tonnes and 294 million tonnes respectively. BHP Billiton commissioned its Rapid Growth 3 project in the second half of 2007, lifting its iron ore output capacity by 20 million tonnes. Similarly, Rio Tinto’s expansion of its Yandicoogina mine (completed mid-2007) added about 16 million tonnes to its capacity, while first production from its new 30 million tonne per year Hope Downs mine (50% Rio Tinto) also contributed. The much smaller producer Fortescue Metals shipped its first cargo of iron ore from its Chichester Range project (45 million tonnes a year) in May 2008. The combination of substantially

higher output and prices is estimated to have lifted industry revenue by nearly 27% in 2007-08.

In addition to higher prices, increases in iron ore output and exports occurred in 2006-07, to 288 million tonnes and 257 million tonnes respectively. BHP Billiton lifted output at a number of mines beyond their original capacity. In the second half of 2006, Rio Tinto expanded its Tom Price and Marandoo mines by 15 million tonnes per year and constructed new mine capacity at Nammuldi. Portman Mining increased the capacity of its Koolyanobbing operation to 8 million tonnes in 2006. A relatively new entrant to the industry, Mount Gibson Iron Ore, contributed to the growth from its Tallering Peak mine. The gains in production for 2006-07 occurred despite the disruptive effect of a severe cyclone (category four Cyclone George) that swept through the Pilbara region of Western Australia in March 2007. Production at major mines in the region and ship loading were halted for several days due to the cyclone. Higher output and prices in 2007 resulted in strong growth in industry revenue.

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Industry Performance

Industry Outlookcontinued

consequent increases in steel demand and the world’s appetite for iron ore will underpin the growth. Australia remains well placed to take advantage of rising activity, as Australia and Brazil are the world’s lowest cost producers of iron ore. By 2016-17, Australia’s iron ore production and exports are forecast to total 700 million tonnes and 665 million tonnes respectively. The increased output will come from both new operations and expansion at existing mines.

Expansions at a number of iron ore projects will come fully onstream over the next few years. BHP Billiton’s Rapid Growth Project 4 has added about 25 million tonnes of iron capacity since 2010. BHP Billiton has also approved Rapid Growth Project 5, which involves rail and port expansions and an increase in iron ore mining capacity to 205 million tonnes per year. Future expansions are planned and precommitment expenditure for Rapid Growth Project 6 has been approved. BHP Billiton plans to lift the capacity of its iron ore mines and associated infrastructure to 350 million tonnes. During the height of the global financial crisis, Rio Tinto deferred a decision on a planned expansion to 320 million tonnes by 2012. However, by October 2009 it had upgraded its long-term iron ore expansion plans to 330 million tonnes per year. As part of that expansion, in December 2010 the company announced it had approved US$1.2 billion of spending to lift its Pilbara iron ore output to about 283 million tonnes by the end of 2013. The investment will add 27 million tonnes per year of capacity to the company’s wholly owned Brockman 4 and Western Turner Syncline mines. Additional mine output will be handled by expanded port and rail facilities. A relatively new entrant to the industry, Fortescue Metals Group completed construction of its 55 million tonne per year Pilbara Iron Ore project in mid-2008, but temporarily postponed a

planned expansion to 80 million tonnes per year. However, plans for a large-scale expansion were quickly reactivated.

Another Fortescue Metals project, Mindy Mindy, has been the subject of considerable controversy. In mid-2004, the company attempted to gain access to BHP Billiton’s Mt Newman rail network in the Pilbara by launching a bid to have the railway declared open for third-party access by the National Competition Council (NCC). Although the NCC found in favour of Fortescue Metals Group, the Federal Treasurer declined to follow the recommendation that the railway line be declared open. Fortescue then initiated proceedings regarding the matter in the Australian Competition Tribunal. The matter was ultimately ruled on by the High Court, which in September 2008 found in favour of Fortescue gaining access to the rail line. In October 2008, the Federal Treasurer announced that third parties were free to apply for 20-year access periods to some Pilbara iron ore rail lines owned by Rio Tinto and BHP Billiton. This decision was only partly backed by the Australian Competition Tribunal. It supported declaring BHP Billiton’s Goldsworthy railway open to other users, but set aside the treasurer’s decision to let smaller miners use Rio Tinto’s Hamersley rail network. The tribunal backed the treasurer’s decision not to declare BHP Billiton’s Mt Newman railway line available for third-party use. The issue of small miners gaining access to transport infrastructure is likely to be hotly contested by both those miners and major players for several years.

Expansions at a number of iron ore projects will come fully onstream over the next few years

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Industry Performance

Taxing The Federal Government plans to impose an MRRT on iron ore and coal from 1 July 2012. Key elements include a headline tax rate of 30.0% imposed on profit after a return equal to the long-term government bond rate has been achieved plus 7.0%; credits for state royalty payments; allowing existing projects to use market value or book value in writing off the capital base; exemptions for small projects with resource profits of less than $50.0 million per year; the immediate write off of investment made after 1 July 2012 for the purposes of the MRRT; and a 25.0% extraction allowance, which reduces the effective MRRT rate to 22.5% and is intended to recognise the contribution made by the miner.

Greenhouse gas emissions will also

be taxed from 1 July 2012, starting at $23 per tonne of carbon dioxide equivalent emitted. The price of carbon permits will increase by 2.5% over the following two years, before a market-based emissions trading scheme commences on 1 July 2015. Under the carbon pricing arrangements, the industry will pay an effective carbon price on transport fuels used in mining operations through reductions in fuel tax credits for fuel used in mining operations. The iron ore pellet production plant in Tasmania plans to claim assistance as an emissions-intensive, trade-exposed operation under the Government’s Jobs and Competitiveness Program, which would provide it with free carbon permits covering the bulk of its emissions.

China will become increasingly important as an investor in the industry

A little moderation Iron ore prices (in US dollars) are expected to ease over the five years through 2016-17 in response to surging global supply. Australian dollar iron ore prices will ease more slowly due to an expected weakening of the local currency. Rising iron ore production will more than offset the effect of weaker prices on industry revenue, yielding growth of 4.3% per annum over the five years through 2016-17. Profit is expected to increase a little more slowly due to cost pressures and new taxes. The re-emergence of skill shortages is expected to push up wage rates, while the Federal Government has plans to introduce a Mineral Resource Rent Tax (MMRT) and a carbon tax from July 2012. Japan was overtaken by China as the largest purchaser of Australian iron ore in 2004-05, and China is expected to retain this position and become increasingly important as an investor in the industry over the next five years. Industry revenue is forecast to reach $69.9 billion in 2016-17.

Sinosteel Midwest Corp is pursuing development of the Chinese Government’s first wholly owned substantial iron ore project in Australia. Its Weld Range project in Western Australia is expected to have annual output capacity of 15 million tonnes per year. The Weld Range project has been fully owned by Sinosteel since 2008, when it bought out its former joint venture partner, Midwest. The project relies on the WA Government’s promise to develop a new rail line and deep-water port at Oakajee, near Geraldton, through which Sinosteel ships its iron ore back to China. In early 2011, Sinosteel was negotiating a mining agreement with the traditional Aboriginal owners of the project site.

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Industry PerformanceThe technology used to mine and transport iron ore is well established

Firms have been engaged in mining iron ore for several decades

Industry output is expanding rapidly

Life Cycle Stage

SOURCE: WWW.IBISWORLD.COM.AU

30

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% G

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declineCrash or Grow?

Potential Hidden GemsFuture Industries

Quality GrowthHigh growth in economic importance; weaker companies close down; developed technology and markets

Time wastersHobby Industries

MaturityCompany consolidation;level of economic importance stable

Shakeout

Shakeout

Quantity GrowthMany new companies; minor growth in economic importance; substantial technology change

Key Features of a Growth Industry

Revenue grows faster than the economyMany new companies enter the marketRapid technology & process changeGrowing customer acceptance of productRapid introduction of products & brands

Bauxite Mining

Iron and Steel Manufacturing

Mining Services

Copper Ore Mining

Petroleum refi ning

Iron Ore Mining

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Industry Performance

Industry Life Cycle The Iron Ore Mining industry is growing. Iron ore production is rising rapidly, with expected industry revenue growth outstripping GDP growth over the five years through 2011-12. Price rises well above inflation levels are producing even stronger growth in industry value added.

This strong performance reflects the emergence of China as a major market. Although the industry’s products are well known rather than new and the technology employed is well established, Chinese participation in the industry is expanding, albeit from a very small base.

This industry is Growing

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Products & Services The Iron Ore Mining industry produces lump ore (6 millimetres to 30 millimetres), iron ore fines (less than 6 millimetres) and iron ore pellets. Fines account for the largest share of production (about 72%), followed by lump ore (nearly 28%). Iron ore pellets account for less than 1% of output. There is little year-to-year variation in these shares, but the proportion of fines in total output has edged up slightly over the past five years from

70% in 2006-07. There has been a corresponding decline in the share of lump ore. This gradual shift reflects the nature of iron ore deposits, which typically contain a larger proportion of fines than lump ore. Lump ore attracts the highest prices as it requires less processing by steelmakers before use. Steel manufacturers typically put fines through a sintering process to agglomerate the ore, making it easier to handle.

KEy BuyING INduSTrIES

C2711 Iron and Steel Manufacturing in Australia Iron ore mining’s only major customers are basic iron and steel manufacturers.

KEy SELLING INduSTrIES

B1520 Mining Services in Australia Iron ore mining makes use of contract miners.

C2510 Petroleum refining in Australia This industry supplies fuel for vehicles used in iron ore mining.

d3611 Electricity Generation in Australia Iron ore miners (especially producers of iron ore pellets) make great use of electricity.

F4522 Metal and Mineral wholesaling in Australia Metal and mineral wholesaling firms play a key role in iron ore exports.

I6201 rail Freight Transport in Australia Iron ore is transported from ports by rail.

I6301 International Sea Transport in Australia Iron ore is exported using international sea transport.

I6623 Port Operators in Australia The bulk of iron ore output is exported through ports.

Products & MarketsSupply Chain | Products & Services | demand determinants Major Markets | International Trade | Business Locations

Supply Chain

Products and services segmentation (2011-12)

Total $56.6bn

72%Iron ore fines 27.7%

Lump ore

0.3%Iron ore pellets

SOURCE: WWW.IBISWORLD.COM.AU

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Products & Markets

Major Markets The bulk of output (typically 95% by value) is exported to steel manufacturers overseas. The Iron Ore Mining industry’s only major domestic customer is the Iron and Steel Manufacturing industry. The great bulk of Australia’s iron is sold under contract, and until the start of the Japanese financial year on April 1, 2010, contract prices were negotiated with major customers on an annual basis. Since that time prices have been agreed on a quarterly basis, but

major producers and some smaller ones are pushing for a move to monthly price setting. Four markets account for virtually all of Australia’s iron ore exports: China (68.5%), Japan (18.5%), South Korea (10.0%) and Taiwan (3.0%). China became the major export destination for Australian iron ore relatively recently, when it displaced Japan in 2004-05. All growth in demand for Australian iron ore over the past few years has come from China.

demanddeterminants

The most important use for iron ore is as the primary input to iron and steel making. The demand for iron ore is therefore heavily dependent on the volume of steel production. Small quantities of iron oxide minerals are also used in cement manufacturing, coal washing and water purification. In turn, demand for steel depends on levels of activity in a range of industries, most notably construction, motor vehicle manufacturing, shipbuilding, plant and equipment manufacturing and consumer goods manufacturing. Australia is a

major producer of iron ore, generally ranking in the top four with Brazil, the countries of the former Soviet Union and China. In terms of the international iron ore trade, Australia is the second largest exporter behind Brazil. Its major export customers are steel manufacturers in Asia. Not only do these customers enjoy cost advantages compared with other producers dealing with steel (enabling them to succeed in export markets for steel), they also typically supply product to the rapidly growing steel consuming industries in their own region.

Major market segmentation (2011-12)

Total $56.6bn

95%Overseas steel manufacturers

5%Domestic iron and steel manufacturers

SOURCE: WWW.IBISWORLD.COM.AU

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Products & Markets

The great bulk of Australia’s iron ore is exported. Indeed, Australia is the world’s largest iron ore exporter. Exports are expected to be about 435 million tonnes in 2011-12, valued at $52.4 billion, compared with 403 million tonnes valued at $47.3 billion in the previous year. As well as higher export volumes, much higher iron ore prices from April 1, 2010 contributed to the increase. Exports typically amount to about 90% of industry output by volume and about 95% by value. Differences between export shares by volume and value are due to variations in the mix of product exported and that used by domestic industry. Occasionally, the value of exports has exceeded industry revenue, reflecting the export of product mined in a previous year. As both the values of imports and of domestic demand are small compared with exports and total revenue, the value of imports may exceed domestic demand when exports are made from stocks.

Four markets account for virtually all Australia’s iron ore exports: China, Japan, South Korea and Taiwan. China became the major export destination for Australian iron ore in 2004-05, displacing

Japan. All the growth in demand for Australian iron ore over the past few years has come from China. Australia’s iron ore exports to China amounted to 99.5 million tonnes in 2004-05, but had reached nearly 266.0 million tonnes by 2009-10. As well as being a major iron ore exporter, Australia also imports iron ore, most of which consists of fines from India. Imports totalled about 5.1 million tonnes in 2009-10. The only substantial local consumers of iron ore are OneSteel Ltd and BlueScope Steel Ltd.

Imports From...

Total $468.9m

80%India

5%Indonesia

5%New Caledonia

5%Other

5%Philippines

Exports To...

Total $52.4bn

68%China

19%Japan

10%South Korea

3%Taiwan

Year: 2011-12SIZE OF CHARTS DOES NOT REPRESENT ACTUAL DATA SOURCE: ABS

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Industry trade balance

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International Trade

Level & Trend Exports in the industry are High and Steady

Imports in the industry are Medium and Steady

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Products & Markets

SOURCE: WWW.IBISWORLD.COM.AU

TAS0.7

wA96.8

QLd0.0

VIC0.0

NSw0.0

NT0.0

SA2.5

ACT0.0

Iron ore production (%)

Cold Zone (<10) <25 <50 Hot Zone (<100) Not applicable

Business Locations 2011-12

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Products & Markets

Business Locations The geographic spread of iron ore output reflects the location of the mineral resource. Nearly all of Australia’s iron ore is mined in Western Australia (about 98.6%) and most of this output is exported. Relatively small quantities of iron ore are mined in South Australia (about 2.5% of output), with production dedicated to domestic steel. The importance of South Australia has increased since 2006-07, due to a decision by OneSteel to develop and mine a magnetite iron ore resource in that state; the output is used by the company in its steel making operations. Iron ore is also mined at Savage River in Tasmania and is processed into iron ore pellets, about half of which are used domestically with the remainder destined for export.

Perc

enta

ge

125

0

25

50

75

100

WA

ACT

NSW N

T

QLD SA TA

S

VIC

Iron ore productionPopulation

Distribution of iron ore production vs. population

SOURCE: WWW.IBISWORLD.COM.AU

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Cost Structure Benchmarks

The major cost items faced by the Iron Ore Mining industry are payments to contractors and materials, which absorb 13% and 16% of revenue respectively. Raw materials used include items such as explosives to break-up both the soil covering the deposits and the iron ore itself, and chemicals used in beneficiation processes. The industry has steadily increased its use of contract miners since industrial relations laws began to be liberalised in the 1990s. As a result, payments to contractors have grown in importance. Other major costs include freight (about 4% of revenue), wages

(3%) and repairs and maintenance (2%). The industry’s reliance on large-scale equipment operating in inhospitable surroundings leads to substantial spending on repairs.

All other costs (e.g. fuel, motor vehicle expenses, hiring and leasing, and administrative expenses) account for about 6% of revenue, leaving about 56% of revenue to provide a return to capital. This share not only provides a pre-tax profit, but must also cover depreciation and items such as royalties. The industry’s depreciation cost amounts to about 5% of revenue,

Key Success Factors Availability of resourceAccess to large, high-grade reserves of iron ore lowers the costs of production and leads to more robust prices.

Effective cost controlsA lean operation is far more likely to survive downturns in demand or price if it has close control over costs.

Economies of scaleLarge-scale mining operations possess both cost and negotiating benefits.

Downstream ownership linksOwnership links with local and overseas steel manufacturers permits easier access to markets when demand is weak.

Access to rail and port facilitiesFirms must be able to access rail and port facilities to export their output. They may either construct their own railways or gain third-party access to existing facilities. Similar arrangements apply to ports.

Market Share Concentration

The Iron Ore Mining industry is highly concentrated, with mines operated by the two largest firms, Rio Tinto and BHP Billiton accounting for almost 90% of output. Their mines are located in the

Pilbara region of Western Australia. Although new firms such as Fortescue Metals Group have entered the industry, the two major players will remain the dominant producers for the next five years.

Competitive LandscapeMarket Share Concentration | Key Success Factors | Cost Structure Benchmarks Basis of Competition | Barriers to Entry | Industry Globalisation

Level Concentration in this industry is High

IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:

Industry costs and average sector costs■ Profi t■ rent■ utilities■ depreciation■ Other■ wages■ Purchases

Industry costs (2011-12)

Average costs of all industries in sector (2011-12)

100%

45.0Profit

16.03.031.05.0

36.5Profit

12.17.335.87.7

SOURCE: WWW.IBISWORLD.COM.AU

0.6

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Competitive Landscape

Barriers to Entry Barriers to entry into the Iron Ore Mining industry are high. Large amounts of capital (typically hundreds of millions of dollars) are required to establish a new mine or acquire existing operations. New entrants must obtain long-term contracts to gain some security. This requires convincing buyers that the ore mined will be of suitable quality and that long-term supply can be guaranteed. New entrants require the skill to engage in negotiations with local communities likely to be affected by a mine. Prospective miners are also likely to require the skills to negotiate rail access agreements with BHP Billiton and Rio Tinto.

Foreign businesses seeking to enter the industry must gain approval from the Foreign Investment Review Board (FIRB). The Chinese Government-

owned firm Chinalco gained FIRB approval in 2008 for its acquisition of a 9.0% stake in Rio Tinto. Even if a planned foreign acquisition gains FIRB approval, the Australian Treasurer may still overrule it if the arrangement is deemed not to be in the nation’s best interests.

Basis of Competition The market for iron ore is a global one and local producers compete not only against each other, but also against operators in other countries. Iron ore is essentially bought and sold on the basis of price. However, the price for different types of ore takes into account variations in quality, with higher grade lump ores attracting higher prices. Other factors, such as the security and reliability of supply and the diversification of supply sources, play secondary roles in competition between iron ore suppliers in world markets.

Rio Tinto and BHP Billiton secure a premium for their iron ore from buyers in Asia, based on lower shipping costs from Australia compared with iron ore of

comparable quality sourced from Brazilian producers. Large producers such as BHP Billiton and Rio Tinto own and operate railway lines dedicated to the transport of iron ore. A smaller producer, Fortescue Metals Group Ltd, attempted to gain access to these railway lines using access regime provisions in the Competition and Consumer Act. Both BHP Billiton and Rio Tinto vigorously oppose opening their railway lines to other producers. BHP Billiton’s Goldsworthy rail line is the only major iron ore mine to port railway declared as open to third-party access under the Act. The Federal Court ruled against Fortescue gaining access to Rio Tinto’s iron ore railways in May 2011.

Cost Structure Benchmarkscontinued

while royalties account for about 6%, reducing the share of revenue available as profit before tax and interest to about 45%. The share of revenue used to fund wages has fallen from about 5% in

2006-07. Although employment and wages per employee have increased since that time, the resulting growth in the wage bill has been swamped by rising revenue.

Level & Trend Competition in this industry is High and the trend is Steady

Barriers to entry checklist Level

Competition HighConcentration HighLife cycle stage GrowthCapital intensity HighTechnology change MediumRegulation and policy HeavyIndustry assistance Low

SOURCE: WWW.IBISWORLD.COM.AU

Level & Trend Barriers to Entry in this industry are High and Steady

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Competitive Landscape

Industry Globalisation

Measures such as the level of foreign ownership indicate that globalisation of the Australian Iron Ore Mining industry is high. The two major participants, BHP

Billiton and Rio Tinto, are both dual listed and have substantial foreign interests in local industry activity; exports are also extremely important to the industry.

SOURCE: WWW.IBISWORLD.COM.AU

Trade Globalisation Going Global: Iron Ore Mining 1992-2011

Expo

rts/

reve

nue

Expo

rts/

reve

nue

200

150

100

50

0

200

150

100

50

0

Imports/domestic demand Imports/domestic demand0 040 4080 80120 120160 160

International trade is a major determinant of an industry’s level of globalisation.

Exports offer growth opportunities for fi rms. However there are legal, economic and political risks associated with dealing in foreign countries.

Import competition can bring a greater risk for companies as foreign producers satisfy domestic demand that local fi rms would otherwise supply.

Export ExportGlobal Global

ImportLocal ImportLocal

Iron Ore Mining 19922011

Level & Trend Globalisation in this industry is High and the trend is Increasing

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Player Performance Rio Tinto Limited participates in the industry via Hamersley Iron Pty Ltd (a wholly owned subsidiary), the Robe River joint venture (53% Rio Tinto) and Hope Downs (50% Rio Tinto). Hamersley Iron is Australia’s largest producer of iron ore. Ore is mined at several sites in Western Australia before being transported to the company’s port at Dampier for export. Most operations other than the Channar mine (60% Hamersley and 40% China Metallurgical Import and Export Corporation) are wholly owned by Rio Tinto. In August 2000, Rio Tinto acquired North Ltd, then one of Australia’s large iron ore miners and the major participant in the Robe River joint venture. The other joint venture partners are Mitsui Iron Ore Development Pty Ltd (33.0%), Nippon Steel Australia Pty Ltd (10.5%) and Sumitomo Metal Australia Pty Ltd (3.5%). The acquisition by Rio Tinto was prompted by the desire to extract synergies from mine development and production, and reduce costs.

The Robe River operations extract ore at the East Deepdale deposits at Pannawonica and transport it by rail to Cape Lambert, where it is crushed and screened prior to being exported as fines. After acquiring Robe River, Rio Tinto pursued cost savings and operational benefits from integrating aspects of that operation and Hamersley. In 2002, the Hamersley power grid was extended to include Robe River’s new West Angelas mine and the Pilbara Rail Company was formed to integrate the rail networks of the two operations. Rio Tinto also holds a 50% stake in the Hope Downs mine, located 50 kilometres from its Yandi and West Angelas operations. Work on the 22 million tonne per year project

commenced in April 2006 at a cost of US$1.0 billion and production commenced in late 2007. In August 2007, Rio Tinto announced that it was embarking on a fast-tracked expansion of the project to lift capacity at Hope Downs to 30 million tonnes per year. Rio Tinto’s share of output from Hope Downs was 5.5 million tonnes in 2008, rising to 10.3 million tonnes in 2009 and 15.9 million tonnes in 2010 due to the expansion.

Overall, Rio Tinto’s output from its iron ore mines in Australia amounted to 176.0 million tonnes in 2010, compared with 161.9 million tonnes in 2009, 142.1 million tonnes in 2008 and 135.2 million tonnes in 2007. Production for 2008 was lower than originally envisaged by Rio Tinto. The global financial crisis caused the miner to slash its planned iron ore output in the final quarter of 2008. However, production was rapidly restored and expanded as markets recovered. Rio Tinto lifted the nameplate capacity of the Cape Lambert port from 55 million tonnes to 80 million tonnes of iron ore per year in 2008. As a result, the company’s mine, rail and port capacity in the Pilbara is matched, and capable of exporting 220 million tonnes per year. A decision on further expansion of the port was delayed in the wake of the softening iron ore market and Rio Tinto’s need to refinance debt. Rio Tinto had previously outlined plans to boost its capacity in the Pilbara, including the port, to 320 million tonnes by 2012 at a cost of about US$10 billion.

Revenue and profit from Rio Tinto’s Australian iron ore operations, converted from US dollars at the average exchange rate, leapt in 2010 as production and prices both rose strongly. It was a

Major Companiesrio Tinto Plc - rio Tinto Limited | BHP Billiton LimitedFortescue Metals Group Limited | Other

Major players(Market share)

12.0%Other

rio Tinto Plc - rio Tinto Limited 41.0%

BHP Billiton Limited 37.0%

Fortescue Metals Group Limited 10.0%

SOURCE: WWW.IBISWORLD.COM.AU

rio Tinto Plc – rio Tinto Limited Market share: 41.0%

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Major Companies

Player Performancecontinued

marked change from 2009, when lower iron ore prices more than offset higher output levels and a weaker Australian dollar. Revenue surged in 2008, reflecting higher tonnages and much higher iron ore prices from 1 April 2008. Rio Tinto and BHP Billiton secured price rises of about 85% at that time. A large part of the increase in revenue flowed through to earnings before interest and tax. Revenue expanded strongly in 2007 and 2006, reflecting a substantial increase in output and much higher prices. Earnings before interest and tax followed a similar path to revenue.

In November 2007, BHP Billiton made merger overtures to Rio Tinto Limited, offering three of its own shares for each Rio Tinto share. Rio Tinto rejected the offer and subsequent higher offers, stating that they undervalued the company. The Chinese Government-owned firm Chinalco, which has substantial operations in the aluminium industries, purchased a 9% stake in Rio Tinto in February 2008 (currently 10%). Chinese buyers of iron ore and, to a lesser extent, coal expressed their concern over the increase in concentration represented by a possible merger between BHP Billiton and Rio Tinto. The global financial crisis and concern over Rio Tinto’s debt levels caused BHP Billiton to withdraw its merger bid in December 2008. In February 2009, Rio Tinto and Chinalco unveiled plans for Chinalco to increase its holding in Rio Tinto by 18% and take direct ownership positions of

15% to 50% of Rio Tinto’s iron ore, bauxite, alumina and aluminium projects. The plan also involved Chinalco entering into a strategic alliance with Rio Tinto in its iron ore, copper and aluminium businesses and becoming an equal partner in an iron ore marketing company that was to sell 30% of the output from the Hamersley iron ore operations.

Rio Tinto’s interest in the deal stemmed largely from the capital injection it represented, given the substantial debt it carried due to its acquisition of Alcan Inc in late 2007. However, other shareholders did not approve of the deal with Chinalco and it was unclear whether it would gain approval from the Foreign Investment Review Board. Rio Tinto withdrew from the deal in June 2009, instead favouring a planned merger of its iron ore interests in the Pilbara with those of BHP Billiton. At that time, the Pilbara merger was expected to save BHP Billiton and Rio Tinto about $10 billion in operating costs, but concerns over the planned deal have been expressed by regulators in Japan, South Korea, Europe and Australia. In addition, the WA Government indicated it would use the merger to end the concessional royalty rate applicable to the two companies on some projects. The 3.75% royalty rate, applied to iron ore projects in the 1960s to encourage companies to build infrastructure, would be lifted to the 5.625% rate that applies to fines extracted from all recent iron ore projects in Western Australia. In October

rio Tinto Limited (iron ore segment) – fi nancial performance

year*revenue ($ billion) (% growth)

NPBT ($ billion) (% growth) Employees

2006 7.7 30.5 4.2 34.8 4,839

2007 9.3 20.8 4.7 11.9 5,679

2008 16.1 73.1 9.9 110.6 7,332

2009 14.0 -13.0 7.6 -23.2 7,670

2010 22.9 63.6 15.5 103.9 9,014

*year end decemberSOURCE: AnnUAL REPORT

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Major Companies

Player Performance BHP Billiton Limited and its subsidiaries are major producers of iron ore, nearly all of which is produced in Australia. BHP Billiton’s operations in Western Australia produced 113.9 million tonnes of iron ore in 2009-10, compared with 106.1 million tonnes in 2008-09, 103.8 million tonnes in 2007-08, 91.6 million tonnes in 2006-07 and 89.6 million tonnes in 2005-06. BHP Billiton mines ore via a number of joint ventures, in which it holds an 85% interest. The ventures comprise the Mount Newman Joint Venture, the Goldsworthy Joint Venture, the Area C Joint Venture and the Yandi Joint Venture. The other participants in the first three ventures are Japanese groups, while the South Korean steelmaker POSCO has an interest in the Area C Joint Venture. BHP Billiton’s mining operations (via these joint ventures) comprise Mount Whaleback and nearby satellite ore bodies 23, 25, 29 and 30; Jimblebar; Yandi Area C; and Yarrie. Processing and shipping facilities are located at Nelson Point and Finucane Island, Port Hedland. All the mining operations have some ore processing capability at the mine sites.

The company has two beneficiation facilities, one at Mount Whaleback and the other at Finucane Island. The Mount Whaleback beneficiation plant treats ores

using a heavy medium (ferrosilicon), drums, cyclones and spiral-circuit techniques to separate the heavier iron ore from the lighter overburden materials. The Finucane Island beneficiation plant uses a similar process to upgrade ore from Yarrie through a wet high-intensity magnetic separation circuit and spirals and jigs. Once the ore is processed at the mines, it is stockpiled over railway load-out facilities. From there, it is loaded into ore cars for railing to Port Hedland. BHP Billiton operates two heavy haulage railroads to Port Hedland, one running 426 kilometres from Newman and the Yandi and Area C mines, and the other 210 kilometres from the Yarrie mine.

In June 2009, BHP Billiton and Rio Tinto announced plans to merge their Pilbara iron ore operations in Western Australia. The planned new production joint venture (with each party holding 50%) was expected to result in substantial savings in operating costs (estimated at $10 billion). However, concerns over the plan have been expressed by regulators in Japan, South Korea, Europe and Australia. In addition, the WA Government indicated that it would use the merger to end the concessional royalty rate applicable to the two companies on some projects. In

Player Performancecontinued

2010, Rio Tinto and BHP Billiton announced they had abandoned plans for the merger of their Pilbara iron ore

production operations, citing opposition from regulatory authorities in several countries.

BHP Billiton Limited (iron ore segment) – fi nancial performance

yearrevenue ($ billion) (% growth)

EBIT ($ billion) (% growth)

2005-06 5.6 42.1 2.9 70.9

2006-07 6.2 10.7 3.1 6.9

2007-08 9.4 51.6 5.0 61.3

2008-09 13.5 43.6 8.4 68.0

2009-10 12.6 -6.7 6.8 -19.0

SOURCE: AnnUAL REPORT

BHP Billiton Limited Market share: 37.0%

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Major Companies

Other Companies Portman Ltd Estimated market share: 2.5%Portman Ltd became a wholly owned subsidiary of US iron ore miner Cliffs Natural Resources Limited at the end of 2008. It had been majority owned (just over 80%) by Cliffs since April 2005. Portman operates the

Koolyanobbing and Cockatoo Island iron ore projects in Western Australia. Portman has progressively expanded capacity at Koolyanobbing from 2.5 million tonnes to 5.0 million tonnes, and in 2006 completed a further expansion to 8.0 million tonnes. Shipments amounted to 7.4 million

Player Performance Fortescue Metals Group Limited is a relatively recent entrant to the industry. Construction of its port, rail and mine project (Cloudbreak) in Western Australia commenced in February 2006. Shipping from the project commenced in May 2008 and project completion was achieved within months. A second mine site, Christmas Creek, was established in May 2009. The volume of ore mined in 2008-09 amounted to 31.0 million tonnes, rising to 41.3 million tonnes in 2009-10. Capacity at

Christmas Creek is being ramped up to permit a total output 55.0 million tonnes of iron ore per year. Company revenue increased strongly in 2009-10 on the back of higher iron ore production, more than offsetting lower iron ore prices and a stronger US dollar. Profit fell in 2009-10, reflecting rising costs, partly associated with mine expansion. The commencement of ore shipments resulted in the company moving into a profit-making position in 2008-09.

Player Performancecontinued

October 2010, Rio Tinto and BHP Billiton announced they had abandoned plans for the merger of their Pilbara iron ore production operations, citing opposition from regulatory authorities in several countries. Unlike Rio Tinto, BHP Billiton opted not to slash its iron ore production in late 2008. Instead, the company maintained production levels by selling onto the spot market, although these sales attracted a lower price than those made under long-term contracts.

Despite much higher iron ore output, BHP Billiton’s iron ore revenue (in

Australian dollars) fell in 2009-10 due to lower iron ore prices and a stronger Australian currency. Profit fell more than revenue as costs increased. Revenue and profit, converted from US dollars at the average exchange rate, soared in 2008-09 and 2007-08 on the back of rising output and higher prices (particularly in 2008-09). A small increase in production and higher prices boosted performance in 2006-07, but extremely large gains were made in 2005-06 due to higher output and much higher iron ore prices.

Fortescue Metals Group Limited – fi nancial performance

yearrevenue ($ billion) (% change)

NPAT ($ million)

2007-08 0.2 n/C -861

2008-09 2.5 1,150 683

2009-10 3.7 48 659

SOURCE: AnnUAL REPORT

Fortescue Metals Group Limited Market share: 10.0%

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Major Companies

Other Companiescontinued

tonnes in 2007, up from 6.7 million in 2006 and 5.8 million tonnes in 2005.

The Cockatoo Island project reprocesses stockpiles of iron ore left behind from earlier mining operations. Portman Mining and the failed contract miner Henry Walker Eltin Ltd were equal joint venturers in the project. Henry Walker Eltin was placed into administration in early 2005, and in November 2005 Leighton Contractors announced that it was acquiring the business. The transaction was completed in February 2006, making Leighton Contractors the new 50% equity holder in the Cockatoo Island project. Shipments from Cockatoo Island amounted to 1.3 million tonnes in 2007, compared with 1.5 million tonnes in 2006.

Portman Mining’s revenue from its iron ore operations has grown rapidly over the past few years, reflecting higher levels of production and substantially higher iron ore prices. Only half-year results are available for 2008 (January to June), but these show a 56% increase in revenue to $412.3 million, from the corresponding period of the previous year. Profit before tax for the first six months of 2008 more than doubled. After rising strongly over 2003 to 2006 on the back of higher revenue, Portman’s profit fell in 2007 as a result of much higher costs. Portman also stated that it was experiencing marked skill shortages.

Jiangsu Shagang Group Co. Ltd Estimated market share: 0.6%Shagang Mining Pty Ltd, an Australian subsidiary of the Chinese steel producer Jiangsu Shagang Group Co. Ltd, became the majority owner of the Savage River iron ore mine and associated pelletising plant in mid-2007. At that time, it purchased 90% of Australian Bulk Minerals (ABM), the holding company for the operation from Stemcor Holdings. The iron ore mine is located at Savage River, while the pellet plant is about 85 kilometres away at Port Latta. Magnetite concentrate is pumped from the mine site

to the pellet plant via a pipeline. The mine had been due to close in 2009, but Jiangsu Shagang is undertaking work to expand mine life by about 15 years. In 2007, work started on a major pre-strip operation designed to extend the life of the Savage River mine through to 2022. The removal of about 56 million tonnes per year of overburden by truck and shovel will provide six million tonnes per year of magnetite ore to produce about 2.5 million tonnes per year of concentrate for pellet production. Production at Savage River amounts to 2.4 million tonnes of iron ore pellets, with about 1.1 million tonnes exported.

The mine has had several ownership changes in the past 15 years. The operation was acquired by ABM from the US firm Pickands Mather and Co International in March 1997. Pickands Mather ceased mining at Savage River in the previous year because it did not believe that additional iron reserves could be won cost-effectively. ABM spent about $110 million rebuilding the Savage Creek operation as a 2.6 million tonne per annum (of concentrate) operation, with an expected mine life of 25 years. Canada-based Ivanhoe Mines Ltd acquired ABM at the end of 2000. Pellet production at Port Latta amounted to 2.1 million tonnes per year to 2.2 million tonnes per year in the early 2000s. Ivanhoe sold ABM to a subsidiary of Stemcor Holdings Limited on 1 March 2005. The purchase price consisted of two equal payments totalling US$21.5 million, plus a series of contingent, escalating-scale annual payments based on the Japanese steel mills iron ore pellet price. The Stemcor Group is a global provider of specialist services to steel industries in areas such as raw materials supply, finished product marketing and trade finance. Production at Savage River dipped to 1.9 million tonnes in 2005-06, about half of which was exported. Output and exports eased to 1.8 million tonnes and 718,000 tonnes respectively in 2006-07.

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Capital Intensity The Iron Ore Mining industry is capital intensive, as illustrated by the large share of value added accruing to capital (profit, depreciation and interest). Much of the capital is tied up in land and heavy earth-moving equipment. During 2006-07 (the latest year for which this information is available), the Iron Ore Mining industry’s net capital expenditure amounted to $4.6 billion. The industry’s ratio of wages to depreciation is about 1:1.7, highlighting the capital intensive nature of the industry. While year-to-year swings in capital spending are not unusual, the industry’s capital spending has grown substantially over the five years through 2011-12 as new mines and mine expansions came onstream to supply rapid growth in iron ore demand, particularly from China.

Operating ConditionsCapital Intensity | Technology & Systems | Industry Volatilityregulation & Policy | Industry Assistance

Tools of the trade: Growth strategies for success

SOURCE: WWW.IBISWORLD.COM.AU

Labo

ur In

tens

ive Capital Intensive

Change in Share of the Economy

New Age Economy

recreation, Personal Services, Health and Education. Firms benefi t from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labour skills are key to product differentiation.

Traditional Service Economy

wholesale and retail. Reliant on labour rather than capital to sell goods. Functions cannot be outsourced therefore fi rms must use new technology or improve staff training to increase revenue growth.

Old Economy

Agriculture and Manufacturing. Traded goods can be produced using cheap labour abroad. To expand fi rms must merge or acquire others to exploit economies of scale, or specialise in niche, high-value products.

Investment Economy

Information, Communications, Mining, Finance and real Estate. To increase revenue fi rms need superior debt management, a stable macroeconomic environment and a sound investment plan.

Bauxite MiningIron and Steel Manufacturing

Mining Services

Copper Ore Mining Petroleum refi ning

Iron Ore Mining

Capital intensity

2.0

0.0

0.5

1.0

1.5

SOURCE: WWW.IBISWORLD.COM.AU

Dotted line shows a high level of capital intensity

Capital units per labour unit

Economy Mining Iron Ore Mining

Level The level of capital intensity is High

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Operating Conditions

regulation & Policy The Iron Ore Mining industry is highly regulated, with state governments in particular overseeing nearly all aspects of operation. State governments determine what land is open to exploration and mining, issue exploration and mining leases and collect royalties from producers. The industry is also open to native title claims under the Native Title Act 1993, commonly known as the Mabo legislation. Once iron ore mines are

operational, firms are subject to environmental laws and regulations dealing with noise, air emissions and the use, handling and disposal of hazardous materials and waste. Firms in the industry are required to comply with federal and state government occupational health and safety regulations and other mandatory requirements for employees, contractors and visitors.

revenue Volatility This industry’s performance is characterised by high levels of revenue volatility. Substantial year-to-year shifts in output occur, reflecting variations in mining conditions and decisions to open mines. Large shifts in iron ore prices are the norm and the main factor contributing to revenue volatility. Iron ore prices are determined on global

markets and reflect the dynamic nature of the supply and demand balance, rising sharply in response to supply shortfalls and falling just as quickly if oversupply emerges. Iron ore prices are denominated in US dollars and, as a result, fluctuations in the value of the Australian dollar against the US dollar add to volatility.

Technology& Systems

Iron ore is mined using fairly straightforward methods. Overburden (soil overlaying the deposit) is removed using heavy earthmoving equipment. The iron ore is extracted, again using earthmoving machinery. The ore may then be crushed to size if required. Often ore from several pits is blended to meet customer specifications. The resulting

product is railed to the port for shipment. Iron ore pelletising involves mixing iron ore fines or crushed iron ore with bentonite (a type of clay) to form small balls. These are baked to yield pellets that are roughly the size of marbles. The fuel used to bake the pellets represents a major cost in iron ore pelletising.

Level The level of Technology Change is Medium

SOURCE: WWW.IBISWORLD.COM.AU

Volatility vs. growth

reve

nue

vola

tility

* (%

)

1000

100

10

1

0.1

Five year annualised revenue growth (%)–30 –10 10 30 50 70

Hazardous

Stagnant

rollercoaster

Blue chip

* Axis is in logarithmic scale

Iron Ore Mining

A higher level of revenue volatility implies greater industry risk. Volatility can negatively affect long-term strategic decisions, such as the time frame for capital investment.

When a fi rm makes poor investment decisions it may face underutilised capacity if demand suddenly falls, or capacity constraints if it rises quickly.

Level The level of Volatility is Very High

Level & Trend The level of Regulation is Heavy and the trend is Steady

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Operating Conditions

Industry Assistance The Iron Ore Mining industry is not protected by tariffs and does not receive any non-tariff import protection. Participants in the industry do have access to the Federal Government’s fuel tax credit scheme, which became effective on 1 July 2006, replacing the previous Energy Grants Credits Scheme (operational from 2003-04 to 2005-06). Under the fuel tax

credits system, eligible users, including those engaged in mining operations and associated heavy freight haulage, claim credits for the tax component of their fuel costs on their business activity statements. This concession will be eroded from 1 July 2012, when an effective carbon price is attached to transport fuel used in mining operations.

regulation & Policycontinued

Resource taxesIron ore producers are required to pay royalties based on the volume and value of mine production to the relevant state government. The royalties charged by the WA Government vary according to the type and use of the iron ore mined. Lump iron ore attracts a royalty of 7.5% realised value (defined as either the free on-board export value or the domestic sale value less any transport costs incurred), while iron ore fines attract a royalty rate of about 5.6%. The royalty applicable to iron ore used in a beneficiation process is 5.0%. In South Australia, a royalty of $1.10 per tonne is payable on iron ore extracted. For the most part, iron ore producers are not required to collect GST and remit it to the Federal Government, since it is not levied on exports. Domestic sales, which form a small part of the total, do attract GST. All producers are able to claim input tax credits.

The Federal Government plans to impose a Mineral Resource Rent Tax (MRRT) on iron ore and coal from 1 July 2012. Key elements include a headline tax rate of 30.0% imposed on profit after a return equal to the long-term government bond rate has been achieved plus 7.0%; credits for state royalty payments; allowing existing projects to

use market value or book value in writing off the capital base; exemptions for small projects with resource profits of less than $50.0 million per year; the immediate write off of investment made after 1 July 2012 for the purposes of the MRRT; and a 25.0% extraction allowance, which reduces the effective MRRT rate to 22.5% and is intended to recognise the contribution made by the miner.

Pricing carbonThe Federal Government plans to introduce a tax on greenhouse gas emissions on 1 July 2012, set at a starting rate of $23 per tonne of carbon dioxide equivalent emitted. The price of carbon permits will increase by 2.5% over the following two years, before a market-based emissions trading scheme commences on 1 July 2015. Under the carbon pricing arrangements, the industry will pay an effective carbon price on transport fuels used in mining operations. The Government plans to impose the carbon tax on this type of fuel use by reducing the fuel tax credit currently available. The iron ore pellet production plant in Tasmania plans to claim assistance as a trade-exposed, emissions-intensive industry under the Government’s Jobs and Competitiveness Program.

Level & Trend The level of Industry Assistance is Low and the trend is Steady

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Key Statisticsrevenue

($m)

Industry Value Added

($m)Establish-

ments Enterprises EmploymentExports

($m)Imports

($m)wages ($m)

domestic demand

($m)

Iron Ore Output

(Megatonne)2002-03 7,608.9 5,074.5 27 19 4,903 7,601.8 162.2 710.9 169.3 198.12003-04 8,152.9 5,085.6 27 19 5,381 7,265 192.7 714.1 1,080.6 221.52004-05 10,621 6,548.3 27 19 6,185 10,761.4 192.2 775.3 51.8 251.92005-06 16,138.8 10,477.2 27 19 6,383 16,233.5 280.4 802 185.7 263.82006-07 19,575.2 13,474.1 27 19 6,594 18,648.3 406.3 1,041.1 1,333.2 287.72007-08 24,786.6 16,359.2 28 19 7,296 23,551.3 357.1 1,177.3 1,592.4 324.72008-09 41,358.6 26,055.9 28 19 7,677 37,625.3 295.6 1,256.7 4,028.9 353.22009-10 37,039.2 23,149.6 28 19 9,105 37,928.6 284.6 1,557.5 -604.8 423.42010-11 51,383.7 29,288.6 28 19 9,319 47,317.7 495.7 1,580.6 4,561.7 4382011-12 56,618.1 32,725.3 29 20 9,894 52,446.3 468.9 1,714.3 4,640.7 4702012-13 53,953.4 30,699.5 29 20 10,729 50,329.4 407.8 1,908.1 4,031.8 5152013-14 62,381.8 35,245.7 30 20 11,111 58,461.6 441.5 2,034.8 4,361.7 5502014-15 71,089.5 39,810.1 30 21 12,000 66,999.4 461.2 2,268.2 4,551.3 6002015-16 64,201.9 35,824.6 30 21 12,871 60,796.4 384.4 2,501.8 3,789.9 6502016-17 69,886.4 38,996.6 31 21 13,725 66,448.4 388.6 2,748.5 3,826.6 700Sector rank 2/19 3/19 10/19 10/19 4/19 2/15 3/7 4/19 2/7 7/19Economy rank 24/499 17/499 476/499 456/498 244/499 3/209 103/189 94/499 57/186 18/499

IVA/revenue (%)

Imports/demand (%)

Exports/revenue (%)

revenue per Employee

($’000)wages/revenue

(%)Employees

per Est.Average wage

($)

Share of the Economy

(%)2002-03 66.69 95.81 99.91 1,551.89 9.34 181.59 144,992.86 0.492003-04 62.38 17.83 89.11 1,515.13 8.76 199.30 132,707.68 0.472004-05 61.65 371.04 101.32 1,717.22 7.30 229.07 125,351.66 0.592005-06 64.92 151.00 100.59 2,528.40 4.97 236.41 125,646.25 0.912006-07 68.83 30.48 95.26 2,968.64 5.32 244.22 157,885.96 1.132007-08 66.00 22.43 95.02 3,397.29 4.75 260.57 161,362.39 1.322008-09 63.00 7.34 90.97 5,387.34 3.04 274.18 163,696.76 2.082009-10 62.50 -47.06 102.40 4,068.01 4.21 325.18 171,059.86 1.802010-11 57.00 10.87 92.09 5,513.86 3.08 332.82 169,610.47 2.242011-12 57.80 10.10 92.63 5,722.47 3.03 341.17 173,266.63 2.412012-13 56.90 10.11 93.28 5,028.74 3.54 369.97 177,845.09 2.172013-14 56.50 10.12 93.72 5,614.42 3.26 370.37 183,133.83 2.412014-15 56.00 10.13 94.25 5,924.13 3.19 400.00 189,016.67 2.652015-16 55.80 10.14 94.70 4,988.11 3.90 429.03 194,374.95 2.322016-17 55.80 10.16 95.08 5,091.91 3.93 442.74 200,255.01 n/ASector rank 7/19 4/7 5/15 1/19 19/19 1/19 1/19 3/19Economy rank 70/499 116/186 8/209 7/499 481/499 10/499 4/499 17/499

Figures are inflation-adjusted 2012 dollars. Rank refers to 2012 data.

revenue (%)

Industry Value Added

(%)

Establish-ments

(%)Enterprises

(%)Employment

(%)Exports

(%)Imports

(%)wages

(%)

domestic demand

(%)

Iron Ore Output

(%)2003-04 7.1 0.2 0.0 0.0 9.7 -4.4 18.8 0.5 538.3 11.82004-05 30.3 28.8 0.0 0.0 14.9 48.1 -0.3 8.6 -95.2 13.72005-06 52.0 60.0 0.0 0.0 3.2 50.8 45.9 3.4 258.5 4.72006-07 21.3 28.6 0.0 0.0 3.3 14.9 44.9 29.8 617.9 9.02007-08 26.6 21.4 3.7 0.0 10.6 26.3 -12.1 13.1 19.4 12.92008-09 66.9 59.3 0.0 0.0 5.2 59.8 -17.2 6.7 153.0 8.82009-10 -10.4 -11.2 0.0 0.0 18.6 0.8 -3.7 23.9 -115.0 19.92010-11 38.7 26.5 0.0 0.0 2.4 24.8 74.2 1.5 -854.2 3.52011-12 10.2 11.7 3.6 5.3 6.2 10.8 -5.4 8.5 1.7 7.32012-13 -4.7 -6.2 0.0 0.0 8.4 -4.0 -13.0 11.3 -13.1 9.62013-14 15.6 14.8 3.4 0.0 3.6 16.2 8.3 6.6 8.2 6.82014-15 14.0 13.0 0.0 5.0 8.0 14.6 4.5 11.5 4.3 9.12015-16 -9.7 -10.0 0.0 0.0 7.3 -9.3 -16.7 10.3 -16.7 8.32016-17 8.9 8.9 3.3 0.0 6.6 9.3 1.1 9.9 1.0 7.7Sector rank 13/19 12/19 7/19 5/19 7/19 8/15 7/7 6/19 7/7 N/AEconomy rank 182/499 139/499 36/499 16/498 18/499 68/209 182/189 19/499 173/186 N/A

Annual Change

Key ratios

Industry data

SOURCE: WWW.IBISWORLD.COM.AU

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Jargon & Glossary

BArrIErS TO ENTry Barriers to entry can be High, Medium or Low. High means new companies struggle to enter an industry, while Low means it is easy for a firm to enter an industry.

CAPITAL/LABOur INTENSITy An indicator of how much capital is used in production as opposed to labour. Level is stated as High, Medium or Low. High is a ratio of less than $3 of wage costs for every $1 of depreciation; Medium is $3-$8 of wage costs to $1 of depreciation; Low is greater than $8 of wage costs for every $1 of depreciation.

CONSTANT PrICES The dollar figures in the Key Statistics table, including forecasts, are adjusted for inflation using 2011-12 as the base year. This removes the impact of changes in the purchasing power of the dollar, leaving only the ‘real’ growth or decline in industry metrics. The inflation adjustments in IBISWorld’s reports are made using the Australian Bureau of Statistics’ implicit GDP price deflator.

dOMESTIC dEMANd The use of goods and services within Australia; the sum of imports and domestic production minus exports.

EArNINGS BEFOrE INTErEST ANd TAX (EBIT) IBISWorld uses EBIT as an indicator of a company’s profitability. It is calculated as revenue minus expenses, excluding tax and interest.

EMPLOyMENT The number of working proprietors, partners, permanent, part-time, temporary and casual employees, and managerial and executive employees.

ENTErPrISE A division that is separately managed and keeps management accounts. The most relevant measure of the number of firms in an industry.

ESTABLISHMENT The smallest type of accounting unit within an Enterprise; usually consists of one or more locations in a state or territory of the country in which it operates.

EXPOrTS The total sales and transfers of goods produced by an industry that are exported.

IMPOrTS The value of goods and services imported with the amount payable to non-residents.

INduSTry CONCENTrATION IBISWorld bases concentration on the top four firms. Concentration is identified as High, Medium or Low. High means the top four players account for over 70% of revenue; Medium is 40 –70% of revenue; Low is less than 40%.

INduSTry rEVENuE The total sales revenue of the industry, including sales (exclusive of excise and sales tax) of goods and services; plus transfers to other firms of the same business; plus subsidies on production; plus all other operating income from outside the firm (such as commission income, repair and service income, and rent, leasing and hiring income); plus capital work done by rental or lease. Receipts from interest royalties, dividends and the sale of fixed tangible assets are excluded.

INduSTry VALuE AddEd The market value of goods and services produced by an industry minus the cost of goods and services used in the production process, which leaves the gross product of the industry (also called its Value Added).

INTErNATIONAL TrAdE The level is determined by: Exports/Revenue: Low is 0-5%; Medium is 5-20%; High is over 20%. Imports/Domestic Demand: Low is 0-5%; Medium is 5-35%; and High is over 35%.

LIFE CyCLE All industries go through periods of Growth, Maturity and Decline. An average life cycle lasts 70 years. Maturity is the longest stage at 40 years with Growth and Decline at 15 years each.

NON-EMPLOyING ESTABLISHMENT Businesses with no paid employment and payroll are known as non-employing establishments. These are mostly set-up by self employed individuals.

VOLATILITy The level of volatility is determined by the percentage change in revenue over the past five years. Volatility levels: Very High is greater than ±20%; High Volatility is between ±10% and ±20%; Moderate Volatility is between ±3% and ±10%; and Low Volatility is less than ±3%.

wAGES The gross total wages and salaries of all employees of the establishment.

Industry Jargon

IBISworld Glossary

FINES Iron ore particles smaller than 6.0 millimetres.

IrON OrE PELLETS Marble-size balls of an iron ore and clay mixture, baked in a large furnace.

LuMP OrE Iron ore particles in the size range of between 6.0 millimetres and 35 millimetres.

OPEN-CuT MINING A type of surface excavation in the form of an inverted cone; the shape of the mine opening varies with the shape of the mineral deposit.

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