Iron ore prices hit an eight-month high on Thursday, prompting one of the world’s biggest miners of the commodity to announce it would resume the multibillion dollar expansion it put on hold in September when prices crashed.
Fortescue Metals Group, the Australian miner founded by billionaire Andrew Forrest, said the company would resume work to triple its production capacity to 155m tonnes by the end of next year in a A$9bn expansion plan.
The resumption marks a U-turn from the pessimism of only four months ago, when the cutbacks were used by some analysts and executives to argue that the commodities supercycle led by the urbanisation of China was over.
But since then iron ore prices have rallied strongly. The cost of the commodity used in steelmaking has risen almost 60 per cent since early September as Chinese steelmakers restock after running down their inventories during the third quarter of the year. Steel production in China remains robust, analysts said.
Fortescue, the world’s fourth-largest iron ore miner behind Vale of Brazil, Rio Tinto and BHP Billiton, produced nearly 60m tonnes in its last fiscal year to the end of September. Four months ago the company said that rather than increase output to 155m tonnes, it would only boost production to 115m tonnes to save money.
Fortescue on Thursday said in a statement to the Australian Stock Exchange that the “recent improvement in iron ore prices and market outlook” allowed it to push ahead with its expansion plan. The company has cut debt by selling a power station and has already refinanced $4.5bn in debt. Fortescue said that “the sale of non-core assets, a reduction in operating costs and the restructuring of existing bank facilities” were also key to its decision to push ahead with its expansion plans.
Iron ore is seen as a proxy for industrial activity and construction in China. The commodity is critical for the profitability of large mining groups, including Vale, Rio Tinto, BHP Billiton and Anglo American, as well as Japanese trading companies such as Mitsui & Co. The price of iron ore is also crucial for the world’s largest steelmakers, including ArcelorMittal and Baosteel Group of China.
Iron ore prices hit a three-year low of just $88 a tonne in early September, prompting concerns among many executives and politicians in iron ore-rich countries such as Australia and Brazil that the commodities boom was over. But on Thursday the cost of the benchmark iron ore – 62 per cent iron content delivered in China – surged to $139.75 a tonne, the highest since mid May, according to Platts, the pricing agency.
Iron ore has traded as high as $150 a tonne this year, having hit an all-time high of almost $200 in early 2011.
The rosier outlook for iron ore has spurred strong inflows to miners of the commodity over the past two weeks. Vale, Rio Tinto and BHP Billiton have benefited particularly from the renewed interest from equity investors.