Blending Iron Ore: Freight, Grade and the 60% Cap
Kyushu Steel runs a blast furnace at a port in Oita and must secure 4.0 million tonnes of iron ore a year for five years. Three offers are on the table, all quoted per tonne FOB: Pilbara, Australia - 62.0% Fe, alumina 2.5%, 3,600 nautical miles, freight $9; Carajás, Brazil - 66.0% Fe, alumina 1.2%, 11,200 nautical miles, freight $26; Saldanha, South Africa - 64.0% Fe, alumina 1.8%, 7,400 nautical miles, freight $17. The furnace needs a burden of at least 63.0% Fe to hold the coke rate, and alumina above 2.3% in the burden sharply raises slag volume and coke consumption. The board has capped any single supplier at 60% of volume. In 2019 a cyclone closed one Australian port for six weeks. The yard holds 45 days of ore, and the sintering plant can absorb any mix within the Fe and alumina limits.
1. Calculate the delivered cost per tonne of contained iron for each source and rank them. What does the ranking show?
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Delivered cost per tonne of ore: Pilbara 85 + 9 = $94; Carajás 92 + 26 = $118; Saldanha 88 + 17 = $105.
A furnace pays for iron, not for rock, so divide by the Fe content: Pilbara 94 ÷ 0.62 = $151.6 per tonne of contained Fe; Carajás 118 ÷ 0.66 = $178.8; Saldanha 105 ÷ 0.64 = $164.1.
Pilbara is cheapest per unit of iron even before the alumina penalty. The point is that the cheapest ore is not the nearest port or the highest grade but the combination that wins on both: Pilbara's low grade is outweighed by a haul one-third as long as Brazil's.
The ranking is sensitive to freight. Carajás would tie with Pilbara if the Brazil-route freight fell to about $8/t (0.66 × 151.6 = $100 delivered, minus $92 FOB), so a five-year contract on a volatile freight route carries real risk.
2. Construct a blend that satisfies all three constraints and cost it per tonne.
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Constraints: Fe ≥ 63.0%, alumina ≤ 2.3%, no supplier above 60%.
Pilbara alone fails: 62.0% Fe is below the minimum and 100% breaks the cap. So take Pilbara at the cap, 60%: Fe contribution 37.2, alumina 1.50.
The remaining 40% must average (63.0 − 37.2) ÷ 0.4 = 64.5% Fe. Only Carajás (66) exceeds that, so Carajás must be at least 10% of the total. Take 15% Carajás and 25% Saldanha:
- Fe = 37.2 + (0.15 × 66 = 9.9) + (0.25 × 64 = 16.0) = 63.1% ✓
- Alumina = 1.50 + 0.18 + 0.45 = 2.13% ✓
- Cost = 0.60 × 94 + 0.15 × 118 + 0.25 × 105 = 56.4 + 17.7 + 26.25 = $100.35/t
That is $17.65/t cheaper than buying all Carajás ($118) and cheaper than all Saldanha ($105) while meeting the Fe limit. The answer is a blend, not a source.
3. Using the stock figure, judge whether supply risk should override the cost result.
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Annual need is 4.0 Mt. Forty-five days of stock = 4.0 × 45/365 ≈ 0.49 Mt; a six-week outage costs 4.0 × 42/365 ≈ 0.46 Mt. The yard therefore covers roughly one repeat of 2019 and nothing more - no margin for a second disruption or a slow restart.
The 60% cap already forces at least two suppliers, which is the right direction; the question is whether the 40% spread over Brazil and South Africa has a genuinely different risk profile (different ocean basins, so yes).
Judgement: accept the cap, but write three things into the contracts - a minimum 75-day stock of the high-grade ore that cannot be substituted, a right to divert up to 10% of Pilbara tonnage to the spot market, and a freight-risk-sharing clause, since the blend's cost advantage depends heavily on Capesize rates between Brazil and Oita.