China’s Direct Losses In The Australian Iron Ore Industry Hit $10 billion


Not many investors can afford to commit more capital after posting losses approaching $10 billion, with the added indignity of a local partner hurling insults, but that’s been China’s recent experience of the Australian iron ore industry.

The money has been spent on two ventures based on turning a low-grade form of iron ore into a high-grade feed for use in steel-making blast furnaces.

The insults have been dished out by Clive Palmer, a larger-than-life mining project promoter and member of the Australian Parliament.

Billions Over Budget And Years Overdue

It was Palmer who enticed the Citic Pacific group to invest in the Sino Iron project, a development budgeted to cost around $3 billion and scheduled to be in full production about four years ago.

At last count the cost of the Sino Iron project had hit $7 billion and production was a fraction of design capacity.

The slow progress has annoyed Palmer who received a handsome one-off payment for selling iron ore deposits to Citic Pacific and should now be receiving an equally handsome and more regular stream of royalty payments.

Citic Pacific, however, disputes the terms of the deal with Palmer and both sides have resorted to the claim and counter-claim that come with all legal arguments.

Savage Criticism

Palmer, a colorful character even by Australian standards, has been savage in his criticism of Citic Pacific and China, using public forums such as media events and his status as a parliamentarian to berate his partner.

Less well-known than the problems at Sino Iron are two other Chinese investments in Australian iron ore, a commodity which has fallen sharply in value over the past three years.

One of the other projects, Karara, is similar in concept to Sino Iron, taking a low-grade ore and turning it into high-grade blast furnace feed.

Unfortunately, Karara has also failed to perform as promised, triggering a series of costly asset-value write-downs by the Australian partner in the project, Gindalbie Metals.

Written Down to Near Zero

Earlier this month, Gindalbie booked a fresh $600 million write-down against its 47.84% stake in Karara, a final accounting entry which effectively wipes off all of Gindalbie’s value in a project which cost more than $3 billion to build.

In theory, that means Karara’s Chinese partner, Angang Steel (or Ansteel as it is known) is facing a decision about whether to also write-down its majority stake in the project to near zero.

Because it has provided most of the capital to build Karara a full write-down could be as much as the $3 billion the project has cost so far with output a fraction of design capacity and at least $1.5 billion over budget.

Come In Number Three

It is into this field of value destruction that a third Chinese company has said it is prepared to commit more than $2 billion on a new iron ore project.

This time the player is Bao Steel which has acquired control of the West Pilbara Iron Ore Project through its takeover of the Australian company, Aquila Resources.

In theory, the West Pilbara project will be a far simpler proposition because the ore to be mined does not require complex processing. It is a dig-and-deliver deposit, but even a simpler business model might struggle as the iron ore price wilts under the pressure of worldwide over-production.

For China, the losses incurred so far on direct Australian iron ore investments can be absorbed.

Less certain is whether the long-term relationship between the two countries can remain unscathed by the verbal criticism of Palmer and members of his political arm, the Palmer United Party.

Source from : Forbes