London, England — 11 April 2013 – The world’s biggest iron-ore producers are planning US$250 billion of new mines, and in the process threatening to deepen a price slump for the commodity which is already forecast to drop for at least the next three years.
Bloomberg News reports that mining companies are facing growing investor pressure to defer or cancel projects to stem price declines. Rio Tinto Group, the second-largest iron ore exporter, will decide on one of the biggest industry expansions in Western Australia in the second half. A decision to delay would boost its earnings in 2015 by US$3.7 billion, according to Liberum Capital Limited.
The price of iron ore, the most shipped commodity after oil, more than tripled in the past decade, encouraging the biggest mining companies to boost output. That was before a surge in Chinese steel output that drove the bull market through 2011, started to wane. Given that iron ore operations made up 78% of Rio’s earnings last year and more than 90% at Brazil’s Vale SA, producers are being forced to review plans.
“It’s the most important issue the mining industry is facing today “’ whether or not to collectively act to destroy the single greatest source of value generation,” said Paul Gait, a London-based analyst at Sanford C. Bernstein & Co. “Getting this right and not repeating the mistakes of the past is absolutely key.”
Investors should be concerned. According to Credit Suisse Group AG, over the last three years, 80% of the time iron ore prices have fallen European mining companies have underperformed.
Rio has approved a US$5.9 billion expansion of port and rail facilities in Western Australia to boost export capacity to 360Mtpa from 290Mtpa. A decision on the mining part of the expansion is yet to be made.
It may cost US$3.5 billion, add 6% to global supplies and trim prices as much as US$18/t in 2015, Liberum said. That’s equivalent to 13% of the current price.
A spokesman for Rio Tinto declined to comment on whether the company would defer the Pilbara expansion.
“BHP, Vale and Rio all need to get with the program here,” Bernstein’s Gait said. “It’s much better for them to preserve the current pricing environment and keep prices high rather than invest billions and billions of dollars of capex simply to chase price downwards.”
BHP Billiton Limited is expanding its Jimblebar mine in Western Australia to add 35Mt of capacity next year. The company is looking “forward to approving one of the lowest capital costs expansion opportunities in the iron ore industry,” CFO Graham Kerr said. A spokesman for Melbourne-based BHP declined to comment on whether the third-biggest exporter was considering scaling back plans.
And Vale’s Serra Sul project, part of the Carajas mining complex in northern Brazil, is the industry’s most expensive project at almost US$20 billion. It will add 90Mt of capacity from late 2016. Like BHP and Rio Tinto, Vale’s press office in Rio de Janeiro declined to comment on whether the company will defer expansion plans.
Still, the three biggest suppliers, responsible for about 60% of global exports, are producing at low enough costs to deliver significant profits at current prices, according to BlackRock’s Hambro.
The price of iron ore delivered to China, the world’s biggest buyer, will drop 20% to US$110/t in 2015, according to the median of six analysts compiled by Bloomberg. It will average US$125 this year and US$115 in 2014, according to the analyst estimates.
Prices have already dropped 12% since reaching a 15-month high of US$158.90/t on February 20 as China’s industrial output had the weakest start to a year since 2009 and concern rose that China would reduce demand for iron ore.
The 50 largest undeveloped projects could more than double global seaborne supplies by adding 1.4 billion tonnes of production at a cost of US$246 billion, Goldman Sachs Group Inc. said last month. The list of projects is primarily comprised of those planned though not yet funded.
Source: Bloomberg News. For more information, click here.