Production and consumption

Iron is the world's most commonly used metal - steel, of which iron ore is the key ingredient, represents almost 95% of all metal used per year.[2] It is used primarily in structural engineering applications and in maritime purposes, automobiles, and general industrial applications (machinery).

Iron-rich rocks are common worldwide, but ore-grade commercial mining operations are dominated by the countries listed in the table aside. The major constraint to economics for iron ore deposits is not necessarily the grade or size of the deposits, because it is not particularly hard to geologically prove enough tonnage of the rocks exist. The main constraint is the position of the iron ore relative to market, the cost of rail infrastructure to get it to market and the energy cost required to do so.

Mining iron ore is a high volume low margin business, as the value of iron is significantly lower than base metals.[6] It is highly capital intensive, and requires significant investment in infrastructure such as rail in order to transport the ore from the mine to a freight ship.[6] For these reasons, iron ore production is concentrated in the hands a few major players.

World production averages two billion metric tons of raw ore annually. The world's largest producer of iron ore is the Brazilian mining corporation Vale, followed by Anglo-Australian companies BHP Billiton and Rio Tinto Group. A further Australian supplier, Fortescue Metals Group Ltd has helped bring Australia's production to second in the world.

The seaborne trade in iron ore, that is, iron ore to be shipped to other countries, was 849m tonnes in 2004.[6] Australia and Brazil dominate the seaborne trade, with 72% of the market.[6] BHP, Rio and Vale control 66% of this market between them.[6]

In Australia iron ore is won from three main sources: pisolite "channel iron deposit" ore derived by mechanical erosion of primary banded-iron formations and accumulated in alluvial channels such as at Pannawonica, Western Australia; and the dominant metasomatically-altered banded iron formation related ores such as at Newman, the Chichester Range, the Hamersley Range and Koolyanobbing, Western Australia. Other types of ore are coming to the fore recently, such as oxidised ferruginous hardcaps, for instance laterite iron ore deposits near Lake Argyle in Western Australia.

The total recoverable reserves of iron ore in India are about 9,602 million tones of hematite and 3,408 million tones of magnetite[citation needed]. Madhya Pradesh, Karnataka, Bihar, Orissa, Goa, Maharashtra, Andhra Pradesh, Kerala, Rajasthan and Tamil Nadu are the principal Indian producers of iron ore.

World consumption of iron ore grows 10% per annum[citation needed] on average with the main consumers being China, Japan, Korea, the United States and the European Union.

China is currently the largest consumer of iron ore, which translates to be the world's largest steel producing country. It is also the largest importer, buying 52% of the seaborne trade in iron ore in 2004.[6] China is followed by Japan and Korea, which consume a significant amount of raw iron ore and metallurgical coal. In 2006, China produced 588 million tons of iron ore, with an annual growth of 38%.
[edit] Iron ore market

Over the last 40 years, iron ore prices have been decided in closed-door negotiations between the small handful of miners and steelmakers which dominate both spot and contract markets. Traditionally, the first deal reached between these two groups sets a benchmark to be followed by the rest of the industry.[2]

This benchmark system has however in recent years begun to break down, with participants along both demand and supply chains calling for a shift to short term pricing. Given that most other commodities already have a mature market-based pricing system, it is natural for iron ore to follow suit. Although exchange-cleared iron ore swap contracts have developed over the past few years, to-date no exchange has established a proper futures market for the largely seaborne $88 billion a year iron ore trade.[7] To answer increasing market demands for more transparent pricing, the pan-Asian multi-product commodity and currency derivatives exchange for global trade Singapore Mercantile Exchange (SMX) is planning to launch soon an iron ore futures contract, subject to regulatory approval from the Monetary Authority of Singapore, based on the Metal Bulletin Iron Ore Index (MBIOI) which utilizes daily price data from a broad spectrum of industry participants and independent Chinese steel consultancy and data provider Shanghai Steelhome's widespread contact base of steel producers and iron ore traders across China.[8]

This move follows a switch to index-based quarterly pricing by the world's three largest iron ore miners - Vale, Rio Tinto and BHP Billiton - in early 2010, breaking a the 40 year tradition of benchmark annual pricing.[9]