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Miners tighten belts as demand flags
MINERS are retrenching, reconsidering plans to invest billions of dollars on new projects - and in some cases cutting output - as they adjust to flagging demand, lower prices and higher labour costs.
"We can't just sit back and hope that things are going to improve tomorrow," Cynthia Carroll, chief executive of London-based Anglo American said after the company announced last Friday that it was cutting capital spending this year by 21 per cent, or $1.5 billion. "We're ratcheting down."
BHP Billiton, Vale SA and Barrick Gold Corp, the world's largest gold producer by output, also are sharpening their pencils.
Vale CEO Murilo Ferreira last week said the world's largest producer of iron ore and blast-furnace pellets was reviewing its investment plans for this year, after the Brazilian company reported nearly a 60 per cent drop in second-quarter net profit. "We are working with a scenario of lower prices than what was expected for this year," he said.
The weak global economy is hitting many industrial and precious metals, including aluminum, gold, nickel, platinum and steel. Europe's sovereign-debt crisis is curtailing consumption there, and economic growth in the US remains anaemic. China, which has been the fastest-growing source of demand for a range of industrial commodities, also is slowing down.
All of that depresses prices. The Dow Jones-UBS Industrial Metals Subindex, which tracks a basket of metals from aluminum to zinc, has fallen 9 per cent this year, after dropping 24 per cent last year.
Investors fear that the declines point to a pause - or even an end - to the so-called supercycle in commodities, which began about a decade ago. The supercycle has been driven by the rapidly expanding appetite in China and emerging markets for raw materials to feed a rising standard of living.
"About half of the institutional investors have stopped investing in mining and cyclical resources," says John Tumazos, an investment adviser based in the US.
With investors dumping shares, commodity producers have to look for ways to protect profit margins and conserve capital to soothe shareholders.
But pulling back on big projects and slowing production poses risks for the economy at large. Near term, cutbacks could reduce big-ticket investments that often create steady jobs and ripple through local economies.
Further ahead, cutbacks also could lead to raw-material shortages when the economy improves, which can spark price jumps.
Output of many materials remains high in historical terms. Prices, too: Iron ore now costs about $120 a tonne, up from an average of $60.80 four years ago.
Luxembourg-based ArcelorMittal, the world's largest steelmaker by volume, last week said that nine of its 25 furnaces in Europe were idle. Standard & Poor's on Thursday cut the steelmaker's credit rating to junk status.
Earlier this year, BHP closed a coal plant in Australia. Aquarius Platinum of Perth, Australia, in June said it would put its mine in the Mpumalanga Province of South Africa "on care and maintenance" because labour issues and falling prices "have rendered the mine uneconomic".
"You're going to see a lot more of this going into the back end of 2012," says William Selesky, an analyst with Argus Research based in New York. "It's just a big slowdown in global economic growth, more specifically China."
Investors are waiting for BHP's earnings report August 22, when the company is expected to reveal elements of its capital-investment plans, which include a possible $30 billion to expand its Olympic Dam mine in South Australia.
The copper-uranium project is considered one of the world's most important mining projects. The company is likely to shrink rather than kill projects entirely, BHP executives say.
The Anglo-Australian company also must decide the fate of an estimated $20 billion expansion at Port Hedland in Western Australia, BHP's key iron-ore shipping point to China. Jimmy Wilson, the president of BHP's iron-ore division, this week told staff that rising costs and falling prices had prompted a review of "the sequence and pace" of growth projects.
Rio Tinto is closing an office in Sydney and cutting jobs in Melbourne, Australia. The moves are a means to contain costs as demand slows without affecting mine operations.
Even the highest-flying commodities are weakening, giving miners and their investors pause. Gold miners, who benefited as the price of bullion rose for the past 11 years, are slowing investment as prices linger 16 per cent below last August's all-time high.
Barrick Gold CEO Jamie Sokalsky last week told investors that the miner would take "a much more rigorous and disciplined approach" to spending. Some planned projects "do not currently meet our investment criteria."
The Pascua-Lama mine on the border of Chile and Argentina was taking longer to build and costing 50 per cent to 60 per cent more than a previous estimate of $4.7 billion to $5 billion, he said.
Miners are responding to the message investors are sending as they bid down shares in commodity producers.
BHP's shares are down 18 per cent, and Rio Tinto's are down 28 per cent in New York trading over the past six months.
The Market Vectors Gold Miners ETF, which holds shares of Barrick and more than two dozen other gold-mining companies, has fallen 18 per cent this year.
"There's a clear signal from shareholders not to fritter [money] away on this unending array of projects," says Mike Elliott, the Sydney-based head of global mining and metals for accounting-and-consulting firm Ernst & Young.