Iron ore supplies hit by natural disasters

Perth: Iron ore supplies remain scarce as markets begin to realise the huge scale of reconstruction required in quake-hit Japan.

But prices are dropping as demand shrinks on tightening moves by top consumer China, global miner Rio Tinto said.

The damage from the massive earthquake and tsunami in Japan held wide implications for the mining sector, Sam Walsh, Rio Tinto's iron ore division chief, told an industry conference.

"The impact of the Japanese earthquake and tsunami have been many and diverse and they affect us," Walsh said on Tuesday. "Some steel mills have suspended operations and suppliers of heavy equipment, such as Hitachi, have been impacted."

He said that large plants, including ones operated by General Motors were running out of Japanese component parts.

"There is a large reconstruction ahead, the magnitude of which is only just being realised," Walsh said.

Demand for iron ore and steel is expected to rebound when Japan starts rebuilding everything from homes to power plants and analysts say Japan's steel capacity, at more than 130 million tonnes, can support the reconstruction.

Spot iron ore prices have lost 15 per cent since hitting record highs in mid-February as slow steel demand in China, the biggest producer and consumer, curbed buying.

Worries that disruptions in steel production in Japan would cut demand from the world's second-biggest buyer of the raw material in the near term pushed prices even lower.

Walsh said Rio Tinto's first-quarter iron ore production would be hit by a string of cyclones that lashed its mining operations in Australia last month.

Expansion setback

Rio Tinto mines 225 million tonnes of iron ore annually, mostly in the Pilbara region of Australia, making it the world's number two producer behind Brazil's Vale. Australia's other big iron ore miners are BHP Billiton, and Fortescue Metals Group.

Those companies are also expected to show production was curtailed by the storms, which flooded rail lines and forced ports to suspend operations.

The majority of the iron ore mined in the Pilbara is shipped to China, followed by Japan and South Korea.

Walsh said Japan's disaster could set back some of Rio Tinto's expansion plans if access to mining equipment, such as heavy machinery and truck tyres, became difficult.

Fortescue, said its expansion plans were on track as it buys very little mining equipment from Japan. The country was the largest buyer of Australian ore, but was supplanted by China.

Walsh painted a bright future for iron ore producers, saying the outlook warranted spending billions of dollars to expand mines in Australia and build new ones in Africa and India.

The company's Simandou iron ore mine project in Guinea — touted by Rio Tinto as the single largest iron ore mine — could be developed ahead of the current end-2015 target date. The mine will have capacity to yield about 95 million tonnes of iron ore a year, he said. Countering Walsh's positive outlook, Citibank analyst Daniel Hynes said the global iron ore market was headed for oversupply in the next few years and would see a 100-million tonne surplus by 2015.