Drop in iron ore prices affecting Chinese production, expansion projects

Thursday, September 13, 2012

The fall in iron ore prices is prompting a drop in output at Chinese companies, which have high production costs, the owner of Brasília-based mining and metals consultancy firm Chroma, Frederico Barboza, told BNamericas.

The price of iron ore fell from US$137/t on July 10 to a low of US$88/t on September 6 and has recovered only slightly since then. The slump in prices is mainly due to weaker demand, especially from the Chinese construction sector.

The decline in iron ore prices "is also putting into question the viability of expanding production capacity at several other mining companies in the world," Barboza said, adding: "The most notable example is BHP Billiton's recent decision to postpone its [Port Headland] 100Mt/y project expansion in Australia."

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BHP's rival, Brazilian mining giant Vale (NYSE: VALE), also plans to reduce its 2013 capex forecast to the lowest level in the last three years due to the decline in iron ore prices.

"Also, government controls aimed at increasing taxes in producing countries and difficulties related to obtaining environmental permits may delay the start-up of some new projects designed to increase production," Barboza said.

None of the major iron ore producers has so far cut production and output of the three big producers combined - Vale, BHP Billiton and Rio Tinto - was up 11% quarter-on-quarter in Q2, according to consultancy firm Capital Economics.

The excess in capacity is not expected to end for three to four years, according to Barboza.

The full interview with Frederico Barboza will be published in this week's Metals Perspectives, for subscribers only.