14 April 2010
In response to last months restructuring of iron ore prices, the China Railway Materials Commercial Corporation (a state-owned steel trader) has signed a deal with African Minerals (an exploration company) to develop the Tonkolili iron ore deposit in Sierra Leone. Last month, Vale and BHP Billiton won their bid to change the way iron ore contracts are negotiated, and prices are expected to double as a result. Higher prices means that mining companies can increase their capital investments and mine in areas that were previously unprofitable. This is why it is no surprise that lower-grade deposits like Tonkolili are now commercially viable mining projects. This is excellent news for the world market because it will decrease the growth in prices caused by rising demand from Asia (which is largely the reason prices were rising so steeply in the first place). It will also dampen the market power of Vale, BHP Billiton, and Rio Tinto (the three main iron ore producers), which should also help lower prices because additional competition forces firms to reduce their profit margins.