Introduction to Economics                                 Lesson 16 / 07



Australia is currently in the midst of a mining boom, equalling or exceeding any that have gone before.  Unlike previous occasions however, the principal element involved, on this occasion, is not gold, or even nickel, but iron ore.  The Australian Bureau of Agricultural and Resource Economics [“ABARE”] projects commodity exports in 2007 to be worth A$117 billion, of which A$ 18.5 billion will arise from iron ore and A$ 15.5 billion from metallurgical coal for steel making.  With worldwide demand rocketing, Australia has recently become the world’s leading exporter of iron ore, and after China and Brazil, is the third biggest producer.


What is It ?                             

The chemical symbol for the element iron is Fe, from the Latin for iron, ‘ferrum’.  Historically it is the most useful of metals. In the form mainly of steel, it is estimated that, in volume, 20 times more of it is used than all other metals combined.  After alumina, it is the Earth’s second most commonly occurring metal, and the fourth most abundant element, after oxygen, silicon, and alumina.  It is estimated that approximately 5% of the Earth’s crust is comprised of iron.


Iron is rarely found in pure form.  Small deposits of such are found occasionally.  They are thought to be the remains of meteorites.  Rather iron generally is found in a variety of forms from which iron is extracted, including the most common form in Australia, haematite  [from the Greek for blood stone, a reference to its colour], limonite, magnetite and siderite [from the Greek word for iron, ‘sideros’].  Although deposits occur occasionally above ground, most commercial deposits are found just below the surface and are mined by open-cut.


Ore is probably best thought of as paydirt; that is to say rock or dirt with a sufficient concentration of a desired commodity, in this case iron, to make it economic to go through the process of extracting it.  Generally the ore mined in Australia is particularly rich, typically comprising more than 60% iron.


Where is It ?

Australia’s proven reserves of high-grade iron ore are in excess of 15 billion tonnes and are among the largest in the world.  In addition, there exists many times more reserves of lesser grade ore. [To put that into perspective, in 2006 Australia produced 275 million tonnes of iron ore, of which 248 million tonnes were exported, whilst total world seaborne transport of iron ore was 880 million tonnes].


Nearly 90% of Australia’s reserves are in Western Australia, 80% of which are located in the Pilbara region.  Most of the Pilbara ore is haematite from the Hamersley Ranges, although limonite is mined at Robe River.  To the north of the Pilbara, in the Kimberley region, iron ore is mined at Cockatoo Island, whilst to the south of the Pilbara iron ore is mined in the Midwest Region, and in the Goldfields Region at Koolyanobbing.  The various mines are serviced by an extensive network of railway lines and a number of ports.  In 2006, W A produced 98% of Australian iron ore production.


Iron ore is also mined in South Australia from haematite in the Middleback Ranges on the Eyre Peninsula near Port Lincoln and which is largely used for domestic production at Wyalla.  Magnetite is mined in Tasmania at Savage River and pumped as slurry via pipeline 85 kilometres to Port Latta in the state’s NW.  Various other small mines are also in operation throughout the country.



Until 1915 only small amounts of iron ore were mined, from various sites throughout the country.  These were for local production and for specialized uses, such as for flux in lead, copper and zinc smelters to facilitate the smelting process, for pigments, and for the making of sulphuric acid, used in the making of superphosphate.


In 1915, mining began at Iron Knob on the Eyre Peninsula, inland between Port Augusta and Wyalla.  This is generally regarded as Australia’s first large iron ore mine.  From the mine the ore was hauled to ports on St Vincent’s Gulf, from where it was shipped to the new steelworks in Newcastle.  Further iron ore mining development followed, particularly in S A.  


In 1936, with Japanese backing, plans were announced to open a large scale mine on Koolan Island in the Kimberleys.  Paradoxically however at that time it was thought that Australia suffered from a scarcity of deposits of iron ore.  In 1938, the Federal government placed an export embargo on iron ore. Ostensibly it was to preserve what was thought to be Australia’s meagre supplies of ore for local steel producers.  The Japanese thought, with considerable justification, that it was part of a plan to cripple their steel industry.  The economic affect of the embargo on exports on Australia however was to remove the incentive to ‘discover’ and develop new mines, so that the ostensible reason for the embargo made it, in effect, a self-fulfilling enactment.


Unfortunately for Australia, particularly W A, the Federal government began to believe its own blather.  Despite the defeat of Japan in 1945 the embargo remained in place.  In 1955, Richard Casey, the Minister for External Affairs and a trained mining engineer, in justifying the continuation of the embargo said,“Australia was poorly endowed with iron ore resources”.  It had been confidently predicted that Australia’s reserves would be exhausted by 1965.  Yet this was at a time following Lang Hancock’s discovery in 1952 of the huge reserves in the Pilbara, which had in fact been noted in government surveys dating back to the C19.


The government finally relaxed the embargo in 1960.  Thereafter the impetus for the large-scale development of W A’s iron ore resources came from Japan.  In one sense, the Federal government had been right; without infrastructure, transport or purchasers the huge reserves might just as well not have existed.  Between 1950 and 1965, however, Japanese crude steel production grew from 4.8 million tonnes to 41.2 million tonnes.  Distance from Brazil, then the world’s leading supplier of high grade ore, placed Japanese steelmakers at a considerable cost disadvantage to closer European steelmakers.


Japan, at that stage, was buying its ore from 14 different countries. Whilst there was some reluctance from Japanese steelmakers to place all their supply eggs in one basket, it made considerable economic sense to chance reliance on the potentially cheap, abundant and high quality Australian ore.  This they proceeded to do, with considerable economic benefit to both countries.


The relaxation of the Canberra embargo finally enabled a few determined, energetic and enterprising individuals, particularly Lang Hancock and his partner Peter Wright in the Pilbara, to realize their dream of developing the vast iron ore resources of W A.  But it was the amazing Japanese economic boom that occurred over the following decades which determined the remarkable extent and speed of that development.  And when the Japanese Economic Miracle began to falter in the 90s, it has been the emergence of China, having shaken off its communist disincentives, and with its huge demand for steel for infrastructure and manufacturing, which has continued to drive Australian iron ore expansion and development  


The Present

The first few years of the C21 have proven extremely successful for the Australian iron ore industry and is a part of the reason why the value of the A$ has reached US$ .90 in the last few days.  Annual contract price rose 9% in 2003, then successively 18.6%, 71.5%, 19% and 9.5% for 2007.  Predictions that the ‘Age of Metals’ was over, and that their use, particularly that of steel, would be replaced by plastics and composites, have been demonstrated to be at least premature.


Marketing practice for the last 40 years has been for an annual benchmark contract price to be set between the major suppliers [presently 3 companies which control 70% of world supply; Brazil’s CVRD, Rio Tinto and BHP Billiton] and the major steelmakers, formerly the Japanese but increasingly now Chinese.  Once the initial benchmark price is set by the largest supplier, [presently CRVD] the other major suppliers usually conform.  Supply not sold by contract is sold on the ‘spot’ I e non-contract] market.  Talks are about to commence to set the 2008 benchmark.


There have been significant increases in supply; in Australia, 8 major mine expansions and several new major mines.  Yet demand continues to exceed supply.  The spot price is up 71% for the year.  Analysts predict a 50% increase in the benchmark price for 2008 and that there will be further price increases thereafter.  Mining developments are long term projects.


BHP Billiton has now declared its intention to seek a significant change in the practice of selling Australian ore.  In particular it proposes to charge the cost of freight, which until now has not been included in the Australian contract price, although it has been with other major suppliers.  Needless to say the buyers are vowing to resist.


Australia’s proximity to southern, Asia which has developed so rapidly in the last few decades, particularly China, India and now the Middle East has been a considerable competitive advantage.  Its political stability and respect for and application of the Rule of Law has been another. 


Thanks to the mining industry, in particular iron ore, Australia’s economic prospects for the foreseeable future seem rosy.  There are potential threats, both internal and external.  Externally a major recession triggered by America’s sub-prime mortgage problems, particularly if, as would be likely, it spread to Asia, would significantly effect Australia.  The potential for internal threats to arise seem as least as great.  These include a return to former industrial relation practices, which bedevilled the industry in the 70s, and the possible application of major new environmental and conservation regulations.



                                                                           David Sharp

                                                                               9 October 2007  




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