Fortescue Metals Group Founder Betting on China to Boost Iron Ore Market
As iron ore prices continue to decline, Fortescue Metals Group Founder Andrew Forrest is betting on China to boost the market. The owner believes iron ore demand will increase over the long term as China begins urbanizing.
According to Bloomberg, roughly 600 cities in China, each of which contains 10 million people, will be constructed over the next 30 years. The shift is expected to boost demand for construction materials, cars and appliances, which will entice ore imports as mining companies ramp up output.
The price of the steel ingredient has declined steeply in the past year, deepening as a global surplus expands. Goldman Sachs Group Inc. declared last week the “end of the Iron Age” and said prices are unlikely to recover.
“Our operating costs into China are about, you know, the mid-$40s to late-$40s, Rio Tinto is about the same, BHP is about the same,” Forrest said. Even with “iron ore prices at $70 or $80, we’re sleeping easily,” he added.
According to Wayne Calder, deputy executive director at the Canberra-based Bureau of Resources and Energy Economics, iron ore may average $90 to $95 a ton over the next five years.
Shares of Fortescue Metal Group have struggled recently falling 4.33 percent to $3.76 on Friday. The iron ore producer’s share have fallen by 36 percent since the beginning of the year.
Low carbon world needs $1.7trn in mining investment
According to a new report from consultancy Wood Mackenzie, mining companies need to invest nearly $1.7trn in the next 15 years to help supply enough copper, cobalt, nickel and other metals needed for the shift to a low carbon world.
Cutting carbon emissions
The United States, Britain, Japan, Canada and others raised their targets on cutting carbon emissions to halt global warming at a summit in April hosted by US President Joe Biden.
Meeting those targets will need large-scale deployment of electric vehicles, storage for power generated from renewables and electricity transmission, all of which require industrial materials, such as lightweight aluminium and metals used in batteries such as cobalt and lithium.
Wood Mackenzie analyst Julian Kettle calculated miners needed to invest about $1.7trn during the next 15 years to “deliver a two-degree pathway - where the rise in global temperatures since pre-industrial times is limited to 2°C”.
“At an industry level, there seems to be reticence around investing sufficient capital to develop future supply at the pace and scale demanded by the energy transition (ET),” he said.
Mining firms are wary of making heavy investments after their experience of the last decade when they invested in new capacity just as demand peaked, leading to a collapse in prices and revenues. They also need to please investors, who are unlikely to want to see dividends diverted to capital spending.
Rising demands of investors related environment, social and governance (ESG) issues further add to the challenge.
Australia, Canada and Western Europe carry a low ESG risk but some of the best resources are in high-risk areas, such as Democratic Republic of Congo, which sits on about half the world’s cobalt reserves according to the U.S. Geological Survey. “Given the need to meet tough decarbonisation and ESG targets, Western governments, lenders, investors and consumers will need to get comfortable operating in jurisdictions where ESG issues are more complex,” Kettle said.
Kettle said government support was needed to help miners comply with ESG issues to ensure production from high-risk areas was conducted in an acceptable way to consumers.
“Then, and only then, will the West be able to secure sufficient volumes of the raw materials needed to pursue the energy transition in the timescales envisaged.”