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Why capital intensity makes a difference
Iron ore companies’ major capital expenditure items are equipment, labor, infrastructure, consultancy, and other services and studies. Capital cost incurred to set up an iron ore unit and operating costs per ton are the two main considerations before setting up a plant.
Capital intensity is a measure used to determine the efficiency of production. It’s calculated by dividing the total capital expenditure (or capex) incurred by the ton capacity of the plant. There are many factors that determine the capital intensity of a project:
Rising capex requirements
Capital expenditure requirements for the iron ore industry have been rising for the past few years, mainly because of:
In conclusion, rising capital expenditures will lead producers to pass on the cost in terms of higher prices over the long-run, while excess supply will keep the prices low. This means only players with scale and financial might are able to do capital investments to add supply to the market at reasonable capital intensity levels. As a result of the current level of prices, all the other capacity additions should cease for the time being.
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