Surging iron ore prices may spur mining investment

Imported iron ore in Nantong, China. Feature China / Barcroft Images / Barcroft Media via Getty Images

Iron ore prices near a multi-year high may revive the investment appetite of miners as current values prices far outstrip the cost of production for most companies, according to Westpac.

This chart by Justin Smirk, senior economist at the bank, looks at the production costs:

“This chart has a lot to say about the current margins are in the seaborne trade and what incentives will be driving the industry this year,” Smirk says. “Invest to expand production is what a short run bump in prices is clearly.”

The price for the metal has rallied on increased demand in China, where traders are also bidding up the futures market.

The strength also corresponds with reports that China is planning further capacity cuts across its steel and coal sectors, which in turn has driven up the price of steel. In 2016, China was aiming to cut 45 million tonnes of steel capacity and reduce coal capacity by 250 million tonnes.

Goldman Sachs estimates the collapse in commodity prices in the past five years will see total global capital spending by mining companies drop about 60% to a forecast $US57 billion next year, from $US145 billion at the peak in 2012.

Miners in Western Australia’s Pilbara region need prices between $US36 a tonne and $US51 a tonne to justify replacement expansions, which could total $US8.2 billion, the bank estimates.

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