Iron Ore Price Rises Really Enough to Jumpstart Fortescue, Vale?

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Has the world changed so much in just a few months?

Back in the summer, miners were shelving expansion plans and new investments due (it was said) to the weakness of commodity prices and the realization that China would be growing more slowly in future than at the breakneck expansion of the last decade.

Now Australia’s iron ore miner Fortescue Metals Group has announced work would resume at its A$9 billion expansion project in January, set to triple output as prices recover. When Fortescue started nine years ago, the iron ore price was $138 per ton, but has suffered considerable volatility in the intervening period.

Last September the price fell back from previous highs of $200 per ton in 2010 to under $90 per ton, according to an FT article, prompting a raft of project delays and cancellations across the industry.

Since then, the price has rallied on the back on inventory re-stocking and continued strong steel production in China, home of half the world’s seaborne iron ore consumption. Where to go from here, then?

Iron ore projects weren’t the only casualty of falling prices. BHP Billiton scrapped $20 billion plans to build the world’s biggest open pit copper and uranium mine in Australia last summer as copper prices fell 25 percent over the previous 18 months, according to the Guardian newspaper at the time.

So far, BHP has not been encouraged to announce a re-start as copper prices have remained under pressure.

But are iron ore miners right to kick the trend and announce re-starts so soon after shelving projects?

Now That’s The Question

Certainly the iron ore price has staged a remarkable recovery, running almost counter to the base metals and precious metals sectors, but A$9 billion is a lot to commit, especially for an already indebted miner, on the basis of just four months of improved prices.

The Asian market on which Fortescue, Vale and the Australians largely rely has been stronger than expected, but the global iron ore industry is expected to remain under severe pressure for years to come.

World steel output between 2003 and 2007 rose more than 6 percent a year for six years in a row, a trend never previously seen since reliable data for the sector became available at the start of the 20th century, according to the FT.

Such prolonged growth was mainly due to China, which between 2000 and 2012 tripled its share of world steel output from 15 percent to 46 percent. But that has since changed — world steel output in 2012 rose just 1.3 percent, compared to 2011, helped by an increase in Chinese production of 3.3 percent, according to industry estimates.

Such growth rates are more likely to be the norm going forward than the 6-percent rates of the last decade. Current iron ore prices may be strong due to inventory re-stocking in China, but has the world really changed that much compared to just four months ago?

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