ECA money has been rushing into the world’s biggest iron ore project, but commercial finance is lacking. Could the poor market outlook be acting as a deterrent to bank lenders? Finbarr Bermingham reports.


Finance is continuing to flow into the giant Roy Hill iron ore project in Australia, despite analysts expressing concern over the market’s outlook.

Korean export credit agencies (ECAs) Kexim and K-sure became the latest institutions to pledge support to the Pilbara project. K-sure is to lend US$1.2bn with Kexim issuing a direct loan of US$1bn late last year.

The Korean ECAs have pledged their support to a project which is 12.5%-owned by Posco, the Korean steelmaker.

Also in December, US Exim pumped almost US$694mn in direct loans into the project, in exchange for the purchase of mining and rail equipment from the likes of Caterpillar, GE and Atlas Copco.

Posco joined Japan’s Marubeni and Taiwan’s China Steel Corporation to inject equity into the project last year, after the project sponsor, Hancock Prospecting, required a cash injection to move forward. The trio took a combined 30% stake in mine, a move which analysts say has helped galvanise the flow of debt into the project.

Project sponsors are hoping to attract A$4bn from ECAs, with a similar figure coming from the commercial banking sector. It was initially hoped that the debt portion would be secured by the end of 2013, but closure seems to be some way off.
The main attraction

Kevin Murphy, an analyst at SNL Metals Economics, tells GTR that the prestigious investor base can be the only thing behind the ramping up in debt financing for the project. He cites the involvement of Gina Rinehart, the chief of Hancock Prospecting, Australia’s richest person and the fourth-richest woman in the world, as one of the main attractions.

“Not too many other projects could attract so much finance,” he says. “Gina Rinehart is just about the sole reason why there’s any finance being brought in – that and the joint venture partners, who are all respected companies who don’t tend to be silly with their money.”

Even before the iron ore from Roy Hill comes online, the outlook for the mineral is gloomy. It began January at its lowest price in five months, after five consecutive days of losses. Analysts are predicting the fall to continue.

“We envisage prices falling from where they are now partly because of the huge capacity online, but also because we’re cautious on the demand outlook, particularly regarding the Chinese steel sector,” says Caroline Bain, senior commodities economist at Capital Economics.

China purchases two-thirds of the world’s seaborne iron ore and imported a record amount in 2013. However, a slowdown in Chinese demand has long been forecast and last year’s move to rebalance the economy from an investment-based to consumption-based approach is expected to bring things to a head.

The Chinese government has moved to consolidate the number of steel mills in the country, with overproduction meaning stockpiles of steel products rose 26% over 2013. In December 2013, China’s iron ore purchases fell by 5.6%. Domestic demand is expected to weaken, and the prospect of further iron ore still coming online seems to be arriving at a strange time.

The decision by some of the world’s foremost steel companies to invest in the mine, however, suggests that the situation may not be as grim as the most pessimistic forecasts have predicted.

“I don’t think we’ll see a complete collapse in Chinese steel, you just won’t see the growth we’ve seen in the past decade,” says Bain. “Infrastructure plans are still ongoing; we just don’t see the same levels of spend as we did before.”

Reaching overcapacity

But overcapacity is expected to be a growing issue in the market for the medium-term at least.

In 2014, Australia (the world’s top iron ore producer) will increase its iron ore exports by 22.1%. Brazil is expected to increase its exports by 9.1%, with Vale leading the way. This is before Roy Hill and new facilities from Vale, Fortescue and Rio Tinto, among others come online (Roy Hill is expected to produce in 2016).

Furthermore, the situation may be exacerbated by the actions of the Indian government. Between April and December 2013, India’s iron ore exports fell by 28.16% – almost certainly as a direct result of the imposition of 30% export duties on the mineral.

The government introduced the duty in an attempt to improve the availability of iron ore for local steel mills and subsequently shipments have fallen by over 80% over the past three years. But there is a strong suggestion that it could be reduced in 2014, leading to yet more iron ore coming into the international markets.

“If that was to come off this year, which they’ve hinted at, it would open things up quite a bit more in the market. It would lead to lower prices, certainly,” Bain says.

And there are few countries in a position to take up the lag in demand. Again, domestic disputes in India restrict its potential to be a world-leading steel producer, with most of the issues being environmental in nature.

Most analysts expect strongly-emerging markets such as Indonesia and Vietnam to experience a growth in demand for iron ore and for OECD countries to reverse the slump that’s dominated their import levels for five years now.

But these factors will likely limit market retraction, rather than add significant growth.

More trouble than it’s worth?

Financing Roy Hill has seen US Exim come in for severe criticism at home. US iron ore production – mainly saturated in the states of Michigan and Minnesota – has been suffering in tandem with falling demand and prices.

A group of three senators wrote an open letter to the ECA in July 2013 expressing concern that “the proposed US Exim financing and the large amount of iron capacity that it would subsidise will… substantially injure American iron ore and steel producers and their employees that are competing in the same global marketplace”.

The loan has reopened the debate about whether US Exim “embodies corporate welfare”, or is a legitimate cause for the good, creating and supporting jobs at home.

In a statement issued to GTR, US Exim defended its actions, saying: “In recognition of the potential for adverse effects on the US economy associated with US Exim financing, the bank carefully weighs the cost and benefits of all transactions it is asked to support. Additionally, all transactions must demonstrate a reasonable assurance of repayment.”

The bank, then, is optimistic that the Roy Hill mine will prove a success, despite market conditions. But commercial banks seem yet to be convinced: as this supplement went to press, none had confirmed debt financing for the project.

Last year, reports emerged that ANZ had extended a US$1bn bridging facility to the mine – a story which a source at the bank strenuously denied to GTR. However, the banker did confirm that ANZ and other commercial banks hoped to be involved in the financing at a later date.