“The world’s biggest iron-ore producers are planning $250 billion of new mines, threatening to deepen a price slump for the commodity already forecast to drop for at least the next three years.
Mining companies are facing growing investor pressure to defer or cancel projects to stem price declines. Rio Tinto Group (RIO), 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 $3.7 billion, according to Liberum Capital Ltd.
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 iron ore operations made up 78 percent of Rio’s earnings last year and more than 90 percent at Brazil’sVale SA (VALE5), 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 percent of the time iron ore prices have fallen European mining companies have underperformed.
