iron ore sales for the year reached a new record level of 9,8 million tons (2009: 7,4 million tons), due mainly to the continued demand from China and a strong recovery in the Japanese and South Korean steel industry. European and South African steel capacity utilisation has not completely recovered to the 2008 highs and these markets could remain subdued in the short term. Despite the global market uncertainty, the market fundamentals for seaborne iron ore trade remain strong and spot prices have recovered well over the past year.
The past financial year finally saw the demise of the annual “benchmark price”, with a strong move towards spot pricing, although pricing mechanisms continue to evolve. Currently, Assmang’s prices are negotiated quarterly. However, other producers are using different periods, spot prices and a blend of fixed and index pricing. The new pricing mechanism follows the supply-and-demand dynamics of iron ore more accurately and to some extent mitigates the high volatility experienced previously. However, steelmakers are wary of the uncertainty that this has caused in their raw material costs as many of their customers are accustomed to annual contracts, and are considering the use of other mechanisms in order to obtain pricing stability.
Post the end of the industry’s fiscal year (31 March), when annual prices were still in place, prices for the first quarter, effective from 1 April 2010, increased substantially, with increases in excess of 95% for both lumpy and fine grades. Prices for the new financial year could remain at high levels, subject to Chinese steel production being maintained and the continued recovery of the developed economies.
Sales volume for next year is expected to increase modestly in line with a better utilisation rate on the iron ore rail line between the mine and the Saldanha Bay port. Efficient utilisation of the rail capacity for the transportation of iron ore to the port remains the immediate challenge in the short term.
Despite the prices increasing significantly in the last financial quarter, the increased sales volumes did not compensate fully for lower average prices for the financial year, and the contribution to Assore’s headline earnings by Assmang’s Iron Ore Division amounted to R718 million (2009: R1 080 million).
Capital expenditure for the year in the Iron Ore Division was R2,3 billion (2009: R2,2 billion) of which R2,1 billion was spent on infrastructural items for the expansion project at the Khumani Iron Ore Mine. This project will increase the mine’s sales capacity from 10 million tons to approximately 16 million tons of iron ore per annum, and is expected to be completed by the scheduled date of July 2012 and within budget.