There’s an $8 Billion Iron Ore Quandary Ahead for Top Miners – by David Stringer (Bloomberg News – November 2, 2016)

The world’s biggest iron ore miners are warning that prices are set to decline — just as they need to begin spending as much as $8 billion developing new mines to keep their best cash machines ticking over.

Over the next five-to-10 years, the miners need new production to replace almost 170 million tons of capacity that’ll be lost as exhausted pits are closed and grades decline at aging operations, according to Global Mining Research Ltd. Even with forecasts that demand for seaborne supply will peak in 2018 and prices may drop below $40 a ton that year, new iron ore projects are seen offering better returns than some alternative investments.

“Economically, it still makes a lot of sense to invest that level of capex, given the returns that these mines are likely to generate,” said Michelle Lopez, a Sydney-based investment manager at Aberdeen Asset Management Ltd., which holds BHP Billiton Ltd. and Rio Tinto Group shares and globally manages $403 billion. Yet, the decisions will be difficult and “for the first time they are actually up against real capital constraints, they haven’t had that in the past couple of years,” she said.

The collapse in commodity prices in the past five years will see total global capital spending by mining companies drop about 60 percent to a forecast $57 billion next year, from $145 billion at the peak in 2012, according to Goldman Sachs Group Inc. estimates. Fortescue Metals Group Ltd., the No. 4 iron ore exporter, plans to make a decision within six months on a potential $1.5 billion investment to replace output, Chief Executive Officer Nev Power said last week.

Rio Tinto, which in August approved its $338 million Silvergrass mine, needs to develop a 50-million-ton mine about every five years to hold production steady, JPMorgan Chase & Co. said in an August note. Miners in Western Australia’s iron-rich Pilbara region need prices between $36 a ton and $51 a ton to justify replacement expansions, which could total $8.2 billion, the bank estimates.

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