Iron ore price could soar after Rio Tinto Limited cans monster project

Credit: iStock

The spot iron ore price could see a big swing up, after Rio Tinto Limited (ASX: RIO) put its giant Simandou project on hold.

Jean-Sébastien Jacques, the new CEO of Rio Tinto, has told The Times that the enormous cost of developing the mine could not be justified in the current environment. The iron ore market is suffering from huge oversupply, with even more low-cost capacity coming on line.

The market conditions in iron ore are clear — there is overcapacity in the marketplace. So when you look at the capital intensity of the project and the current iron ore market conditions, the alignment of stars is not the right one from our perspective,” he said.

Brazil’s Vale is developing its S11 expansion which is expected to add another 90 million tonnes of ultra-low cost, high grade seaborne iron ore capacity. Gina Rinehart’s Roy Hill mine is still working up to full production capacity of 55 million tonnes annually and it too is low cost iron ore.

Rio itself has increased production from 145 million tonnes in 2007 to 330 million tonnes in recent years, while BHP Billiton Limited (ASX: BHP) has gone from 99 million tonnes in 2007 to 245 million tonnes last financial year (FY15).

Fortescue Metals Group Limited (ASX: FMG) has gone from nothing in 2007 to 165 million tonnes presently, and with ultra-low cash costs too.

Simandou in Guinea, Africa is the world’s largest untapped iron ore deposit, containing an estimate 2 billion plus tonnes of the commodity, but would cost Rio around US$20 billion to develop according to some estimates.

Rio’s previous CEO Sam Walsh had repeatedly said that the mine would be developed, but the decision to shelve the project now could have disastrous consequences. Relations with the Guinea government are reportedly already fractious and the government responded to Mr Jacques’s comments by saying that it would not let the project be derailed.

Foolish takeaway

Taking an additional 100 million tonnes of iron ore production off the table could see oversupply ease somewhat, and the iron ore price rise from its current level of around US$54.33 a tonne.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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