Chinese investment in Canadian iron ore expected to rise

Volatile iron ore prices in 2013 should prompt Chinese firms to continue investing in Canadian development projects, an industry analyst said Wednesday.

Jackie Przybylowski of Desjardins Capital Markets expects investments will continue on "an opportunistic basis" in the coming year, after a very active 2012 when the Chinese bought into projects around the world, including five in Canada.

"Chinese steelmakers' investment in Canadian iron ore and metallurgical coal development projects is a positive as this provides firms with access to much-needed and hard-to-secure capital," she wrote in a report.

Late last year, China Steel Corp. in partnership with South Korean steelmaker Posco, acquired a 15 per cent stake in Montreal-based ArcelorMittal Mines Canada for $1.1 billion in cash.

Earlier Chinese investments in Canada included Century Iron Mines'Sunny Lake project, Northern Star Minerals Ltd., Alderon Iron Oreand Adriana Resources' Lac Oteinuk project.

Przybylowski said investors are seeking projects with potential for significant longer-term production volumes and will generally invest in projects at an early stage.

Champion Iron Minesis viewed as the most likely to sign a joint venture partnership or supply agreement since it faces a large gap between anticipated 2013 spending an available funds, Przybylowski said.

The Toronto-based company didn't respond to a request for comment.

Others companies developing projects in Canada, such as Alderon Iron Ore and New Millennium, have deals in place that are expected to provide some or all of the required capital spending this year, deferring their need to raise cash.

Przybylowski said Chinese steel firms will continue to secure long-term ore supply and manage input costs in the face of continued volatility of iron ore prices this year.

Price predicted to drop

She predicted the benchmark iron ore price will drop to $120 US per tonne for 63.5 per cent iron grade, down from $136 in 2012.

The current spot price has surged 60 per cent from the September low to $154 per tonne. The price has partly increased due to seasonal restocking ahead of the Chinese new year and to protect against price increases from monsoons in Australia.

Last year was marked by extreme volatility with prices plummeting in the summer and rebounding in the fourth quarter because of quick supply responses by marginal cost miners. Lower prices in the third quarter prompted the closing of about five to 10 per cent or China's iron ore production capacity.

"We expect that current high spot prices will again trigger a new supply response, adding supply back into the market and further perpetuating spot price volatility."

Although the growth in Chinese iron ore consumption should slow to four per cent in 2013, down from 5.4 per cent in 2012 and 6.8 per cent in 2011, the analyst said the country is expected to use more than half the world's iron ore over the next two years.

The main driver for Chinese iron ore demand will be the continuing urbanization of the rural regions. However, the new government is not expected to promote infrastructure spending as a stimulus measure as it attempts to shift the economy toward domestic demand.

Przybylowski said there's a risk of oversupply in the longer term from a series of expansions and new projects as demand growth slows and developing countries mature.

Annual iron ore capacity could grow more than one billion tonnes by around 2017 if just some of the large projects proceed.

Canadian supply is expected to increase 30 per cent to reach 52 million tonnes this year and 57 million tonnes in 2014.

Global supply is expected to reach about 2.15 billion tonnes next year, compared to an estimated two billion tonnes of demand.