Iron ore demand growth looks inevitable

Even as high-priced iron ores continue to reap dividends and defy bearish predictions, Cyclone Metals CEO Paul Berend sees a fundamental disconnect between capital market expectations and the economic realities of iron ore and steel production.

Over the past few years, an average price ranging between US$120 and US$130 ($183-198) for benchmark iron ore prices has continually defied analyst expectations of prices of US$80 a tonne ($122/t) or lower; but Berend can see where the bears went wrong.

Where analysts see a slowing Chinese economy and projects negative growth of steel consumption, Berend believes they are simply not considering the size of the dragon’s economy and the history of steel production in developed economies over the last hundred years.

“The slowing Chinese economy is still four or five times bigger than it was 30 years ago and still growing. The rule of thumb is that iron ore demand increases by GDP plus one or two per cent for developing nations and GDP minus one for developed nations,” the Cyclone Metals chief says.

Berend explains that even a low estimate of Chinese demand at half of the world’s seaborne iron ore and a gross domestic product growth of 3%, this still adds up to 30 million tonnes of new iron ore demand every year – big numbers, and that’s just China. That is a new massive iron ore mine every year.

“The Chinese economy is maturing, and exponential growth is a thing of the past, but incremental growth will remain which is still huge in absolute terms,” he says.

And that growth stands opposed to a shortage of iron ore resources and major infrastructure bottlenecks.

“Mines are becoming depleted and not being replaced, even if the Chinese economy is slowing, it’s such a huge snowball that there is still huge pressure on demand,” Berend notes.

“When I was at Rio Tinto, we operated eight mines to get the Pilbara blend, the basic Rio 62% benchmark product. Now Rio operates 16 mines to achieve the same. The planet doesn’t have infinite resources.”

Then there is the emissions aspect, with steelmaking standing as the second largest source of human C02 emissions in the atmosphere representing about 8% of the total.

The European Union is rolling out aggressive carbon taxes applying to EU-produced steel as well as imports which could increase steel making costs by 30% or more if the current legislation gets fully implemented.

Berend says anything enabling a reduced carbon footprint is critical for the sustainability of steel producers regardless of the local legislative frameworks.

“You will hear about green steel and exotic technologies, but in the real world, the quickest way to reduce your footprint is to use cleaner raw materials so you need less fuel (mostly coal) and hence produce less waste CO2. High-quality magnetite concentrates have a substantially lower carbon footprint than hematite iron ores which represent most of the production from Vale, BHP and Rio Tinto,” he says.

“There is a seismic shift starting in the steel industry, as traditional steel mills increasingly migrate to magnetite iron ore products to reduce their carbon footprint.

“Not to mention that magnetite concentrates are required for alternative low-carbon technologies such as DRI steel making, which has half the carbon footprint of a typical blast-furnace route if using natural gas and close to zero if using renewable hydrogen. So, magnetites are the future of iron ore.”

Indian emergence

The prospect of mass Indian industrialisation looms as the nation of 1.4 billion people has passed an important point of inflection this year and moved from a net exporter of iron ore to a net importer.

“When China shifted from import to export in 2004, you had an exponential growth of ferrous raw materials demand to underpin growth in infrastructure and housing. I think India is reaching that same tipping point. I’m very optimistic there and think it’s the next big shock for raw materials,” Berend says.

India’s economy remains dwarfed by China, and Berend doesn’t see a huge initial impact, but a lasting one which could grow over a few years as India closes the development gap with China.

“I think we’re not that far away from another structural shock, which none of the analysts see but they never do,” he says.

Finding Iron Bear

As North American TSX investors were rushing to fund cannabis stocks in 2022 and 2023, a group of Perth-based entrepreneurs and investors decided to focus instead on undervalued natural resource assets.

“We screened dozens and dozens of assets listed on the TSX, and eventually found Project Iron Bear which was an exciting magnetite iron ore project which was un-fundable on the TSX. So, we decided to move it to the ASX and build a highly competent team to develop it,” Berend recalls.

“I liked three things about Project Iron Bear, firstly iron ore is an infrastructure game, and it was just 25 kilometres away from a heavy-haul access-rail connected to an open-access port.

“Secondly, it is an exceptionally clean deposit with very low deleterious elements. We thought there was a great chance of hitting 70%-plus Fe magnetite product and getting the steel mills excited – which proved true.

“Number three was access to hydropower. The main cost of producing magnetite concentrates is grinding which is driven by energy costs. Fuel costs are very high in Australia and fossil fuels means a big carbon footprint, so with hydropower the equation changes completely because it’s so incredibly cheap – literally eight to 10 times cheaper than Australian power for similar projects.”

Cyclone acquired Project Iron Bear in April 2023 and has been developing the project at a very high pace – including completing extensive metallurgical tests, building a pilot plant, upgrading the mineral resource, and completing economic studies for rail and power.

“The last quarter delivered pretty much everything I was hoping for and beyond, and the next period is going to be even more exciting. We have a simple and aggressive plan so far, we have delivered every milestone as announced when we started nearly a year ago,” Berend shares.

“It’s still risky, I won’t underplay that, but test work and field work have delivered beyond our wildest expectations. It’s looking fantastic from a cost and quality perspective – now our focus is on sustainability and building a leadership team in Canada.

“We will be the first in the world to produce iron ore with no tailings dam – to protect the people and environment in Quebec and Newfoundland Labrador. That is a commitment, not empty-value virtue signalling.”

Iron investment

Despite high prices, iron ore is hardly a hot commodity for retail markets, and Berend says it’s difficult for juniors to fund even the best iron ore projects. Lithium and battery minerals were all the rage until recently with little interest for industrial commodities.

“The idea an economy can function without steel is completely absurd, but unless major American investment banks change their outlook we’re going to go through another year of depressed valuations,” Berend predicts.

“But at some point, reality always wins.”

And even compared to assets held by Cyclone’s iron ore junior peers, Berend believes Project Iron Bear remains remarkably undervalued.

“A lot of projects have obvious flaws, like no access to infrastructure, and even if many of them have lost half their value this year, but they’re still worth five to 10 times more than we are. Our strategy is to focus on the steel mills who can buy our magnetite products and fund our development. This is a winning strategy if you can deliver the goods,” he says.

“Iron Bear is so strong, with very low costs and extremely low carbon footprint. We are currently producing a magnetite concentrate grading 70.6% Fe 1.2% silica in our pilot plant in Quebec City. None of our peers even come close to achieving this. We will be shipping bulk samples of this product to steel mills in Q2 2024 for pelletising test work and then hopefully for JV discussions.”

Western Australian minerals explorer Cyclone Metals is based in West Leederville and is led by an executive team that includes chairman Tony Sage and CEO Paul Berend. It was previously known as Cape Lambert Resources.

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