For an industry dealing with the end of a once-in-a-lifetime demand surge, big miners aren't faring too badly. China's demand for raw materials might not be growing as fast as it used to, but prices of key commodities like iron ore and copper are still high by historical standards. And recent financial results from BHP Billiton and Rio Tinto show austerity working.
Supply trends favor lower ore prices over time, but the biggest miners may go on reaping healthy profits for a while yet. Two broad trends explain the industry's resilience.
BASE EFFECTS
First, prices of key commodities are still relatively high. Iron ore and copper prices have both fallen more than 30 percent from their 2011 peaks, but at about $120 per tonne, sea-borne iron ore still costs 10 times what it did before Chinese demand for raw materials took off in the early 2000s. Copper is also trading way above its pre-boom levels.
The Middle Kingdom's steel production today may be more likely to increase at a fraction, rather than a multiple, of underlying GDP growth. But overall demand for iron ore is still rising. It's only the intensity of growth that's waned. In volume terms, China is consuming more raw materials than ever.
That means new supply being brought on line by BHP, Rio and other Western miners has yet to displace inefficient Chinese suppliers, who are the marginal global producers of the steel ingredient. China's domestic diggers have far higher costs than BHP and Rio Tinto, which scoop rock cheaply out of open pits. As long as Chinese output is needed to meet demand, prices are unlikely to fall sharply.
China's hunger for copper, used in things like indoor plumbing and electrical wiring, has also proved resilient. Preliminary January data showed imports for the month at a new record, up more than 50 percent from a year ago. China's state power grid company, a big copper user, got more money than expected in China's recent budgeting round. Tight credit conditions in China mean the red metal is also increasingly in demand for use as collateral in financing trades.
Second, after a decade spent building new projects as fast as possible to meet surging Chinese demand, miners are finding that disinvestment pays.
Modern mines take years to build and ramp up to full production. But spending for the future can be pared back relatively quickly. BHP expects its spending on capital investment and exploration to fall by a quarter this fiscal year. Rio reported a similar decline in its full-year results.
Miners are also pushing hard on costs and productivity, just as investments in new mines approved during the last few years of the boom start to pay off, with both Rio and BHP boasting record iron ore output.
The salutary combination of cost efficiency, rising production and high prices helps explain why low-cost operators like BHP and Rio are still making such chunky profits. The combination of rising volumes and cost savings pushed profit after special items at BHP up 31 percent in the first half of its fiscal year. Underlying profit at Rio jumped 45 percent in the six months ended in December.
The two companies are on track to make operating margins north of 30 percent this year. That's down from 40 percent in 2011, when ore prices peaked, but still pretty remarkable. Both companies' long-term strategy of investing in low-cost, high-quality mines are a big help.
Supply trends point to lower iron ore prices over time. Despite recent cuts to capex, miners are still investing heavily in their most promising basins. Chuck Bradford, a metals forecaster, says the world's top five producers are on track to expand their iron ore output by 50 percent over the next four years, even with the recent austerity drive. BHP thinks the coming wave of supply could start to displace expensive Chinese producers by 2015.
The outlook is more bullish for copper. As a financially traded commodity, the red metal may be more exposed to the withdrawal of Western quantitative easing than iron. But while iron ore is widely available, big new copper mines are rare. What's more, the owners of existing mines have already dug up the richest deposits. The higher cost of mining and refining depleted ores should help support prices. Copper's different industrial uses mean peak Chinese demand should also come later than for iron ore.
That may keep copper prices high, even as iron ore prices sink. Either way, though, the end of the super-cycle isn't proving nearly as bruising for the big miners as it might have been.
Source: reuters
Supply trends favor lower ore prices over time, but the biggest miners may go on reaping healthy profits for a while yet. Two broad trends explain the industry's resilience.
BASE EFFECTS
First, prices of key commodities are still relatively high. Iron ore and copper prices have both fallen more than 30 percent from their 2011 peaks, but at about $120 per tonne, sea-borne iron ore still costs 10 times what it did before Chinese demand for raw materials took off in the early 2000s. Copper is also trading way above its pre-boom levels.
The Middle Kingdom's steel production today may be more likely to increase at a fraction, rather than a multiple, of underlying GDP growth. But overall demand for iron ore is still rising. It's only the intensity of growth that's waned. In volume terms, China is consuming more raw materials than ever.
That means new supply being brought on line by BHP, Rio and other Western miners has yet to displace inefficient Chinese suppliers, who are the marginal global producers of the steel ingredient. China's domestic diggers have far higher costs than BHP and Rio Tinto, which scoop rock cheaply out of open pits. As long as Chinese output is needed to meet demand, prices are unlikely to fall sharply.
China's hunger for copper, used in things like indoor plumbing and electrical wiring, has also proved resilient. Preliminary January data showed imports for the month at a new record, up more than 50 percent from a year ago. China's state power grid company, a big copper user, got more money than expected in China's recent budgeting round. Tight credit conditions in China mean the red metal is also increasingly in demand for use as collateral in financing trades.
Second, after a decade spent building new projects as fast as possible to meet surging Chinese demand, miners are finding that disinvestment pays.
Modern mines take years to build and ramp up to full production. But spending for the future can be pared back relatively quickly. BHP expects its spending on capital investment and exploration to fall by a quarter this fiscal year. Rio reported a similar decline in its full-year results.
Miners are also pushing hard on costs and productivity, just as investments in new mines approved during the last few years of the boom start to pay off, with both Rio and BHP boasting record iron ore output.
The salutary combination of cost efficiency, rising production and high prices helps explain why low-cost operators like BHP and Rio are still making such chunky profits. The combination of rising volumes and cost savings pushed profit after special items at BHP up 31 percent in the first half of its fiscal year. Underlying profit at Rio jumped 45 percent in the six months ended in December.
The two companies are on track to make operating margins north of 30 percent this year. That's down from 40 percent in 2011, when ore prices peaked, but still pretty remarkable. Both companies' long-term strategy of investing in low-cost, high-quality mines are a big help.
Supply trends point to lower iron ore prices over time. Despite recent cuts to capex, miners are still investing heavily in their most promising basins. Chuck Bradford, a metals forecaster, says the world's top five producers are on track to expand their iron ore output by 50 percent over the next four years, even with the recent austerity drive. BHP thinks the coming wave of supply could start to displace expensive Chinese producers by 2015.
The outlook is more bullish for copper. As a financially traded commodity, the red metal may be more exposed to the withdrawal of Western quantitative easing than iron. But while iron ore is widely available, big new copper mines are rare. What's more, the owners of existing mines have already dug up the richest deposits. The higher cost of mining and refining depleted ores should help support prices. Copper's different industrial uses mean peak Chinese demand should also come later than for iron ore.
That may keep copper prices high, even as iron ore prices sink. Either way, though, the end of the super-cycle isn't proving nearly as bruising for the big miners as it might have been.
