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BHP, Rio, Fortescue shareholders to benefit from solid iron ore outlook

The Bureau of Resources and Energy Economics (BREE) has just released its September Quarterly and its forecasts for ongoing iron ore demand should provide investor support for Australia’s iron ore majors.

While BREE is forecasting the world economy to grow by just 3% in 2013, which would mark the lowest level of growth since the GFC in 2009, growth in emerging economies in 2013 is expected to be higher at 4.8%. Of particular importance to Australian miners, China’s growth is forecast to be a robust 7.3%. Indeed, BREE is forecasting China’s economy to continue growing in the 7.3% to 7.5% range through to 2019.

In determining China’s growth rates BREE has assumed a pick-up in residential construction in late 2013 that will carry through into 2014, helped along by potential interest rate reductions. Infrastructure investment is also forecast to pick up, particularly spending on rail, energy and air pollution projects.

Chinese growth — as has been the case over the past decade — should underpin demand for Australia’s iron ore. BREE is forecasting an annual growth rate between 2013 and 2018 of 10.2% in Australian iron ore export volumes. Likewise, over the same period BREE expects iron ore export vale to rise by 6.4% per annum.

These forecasts bode well for the majors who operate with significant economies of scale and good leverage to higher volumes. BHP Billiton (ASX: BHP) produced 170 million tonnes of iron ore in financial year 2013, up from 134 million in 2011.

Meanwhile Rio Tinto (ASX: RIO) has just completed the first major expansion phase of its iron ore operations in the Pilbara. The expansion will see Rio targeting production of 290 million tonnes of ore per year from its Pilbara operations while the phase two expansion is targeting a production level of 360 million tonnes per year.

Fortescue Metals Group (ASX: FMG) increased volumes by 44% in financial year 2013 to ship 40.1 million tonnes of iron ore. The miner also has an expansion project under consideration which will see the miner leap to 155 million tonnes per annum.

Foolish takeaway

With the iron ore majors achieving lower production costs through efficiency gains, the profit margins on their businesses are very impressive. Even at significantly lower iron ore prices, the majors will still have very profitable operations given volume demand however investors would be advised to assume conservative price forecasts when conducting their valuations.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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