CRU: Making Iron Ore Investment Decisions in Times of Uncertainty

20 July 2019

Iron ore prices reached above $120 /t in July 2019 following supply disruptions fuelled by Vale's tailings dam disaster in Brazil and cyclones in Western Australia.

Price volatility has been significant over the past decade and this volatility is expected to continue making investment decisions difficult. In this Insight, we explain the importance of understanding and quantifying the inherent uncertainty associated with iron ore price forecasting and valuations to support robust investment decision making and explain how CRU's risk adjusted decision making tools including Real Options, can help.

What is the importance of today's prices?

Following a sharp decline in iron ore prices in 2014 (iron ore prices declined from $120 /t in Q1 to $74 /t in Q4), the iron ore industry saw a large number of mostly small-scale miners exit the market. Indeed, our analysis shows that ~40 Mt/y of high-cost supply exited the market by 2015. This was mainly driven by the delayed supply response from low-cost majors (We exclude mines which reached their end of life and only focused on the mines/projects which closed due to uncompetitive status).

From an investment perspective, the two main features of iron ore projects are a long investment horizon and high capital intensity of the project. Generally, the investment decision is dependent on the trajectory of the price outlook as well as the certainty in this trajectory. The decision to invest in or terminate a project is often underpinned by consensus expectations for iron ore prices. Price expectations change over time and are influenced by current prices. The volatility of price expectation is one of the key indicators for the likelihood of future investment in a mine. Movement in the consensus forecast drives the investment decision of an asset. However, only relying on the consensus price forecast to make an investment decision has its limitations given that its based on the current average expectations of the future.

About CRU

CRU offers unrivalled business intelligence on the global metals, mining and fertilizer industries through market analysis, price assessments, consultancy and events.

Since our foundation by Robert Perlman in 1969, we have consistently invested in primary research and robust methodologies, and developed expert teams in key locations worldwide, including in hard-to-reach markets such as China.

CRU employs over 280 experts and has more than 11 offices around the world, in Europe, the Americas, China, Asia and Australia – our office in Beijing opened in 2004 and Singapore in 2018.

When facing critical business decisions, you can rely on our first-hand knowledge to give you a complete view of a commodity market. And you can engage with our experts directly, for the full picture and a personalised response.

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