Belt-tightening by miners as metals prices tumble could mean some projects never see the light of day, leaving supply lagging once demand picks up and paving the way for the next metals rally in two to three years.
The list of companies slashing capital expenditure and delaying projects grows daily. On Wednesday, Anglo American said it would halve its capital spending next year.
“I’m worried that price falls mean an absolute disaster for exploration and will translate into a lack of projects, the same way it did four to five years ago,” said Magnus Ericsson, senior partner at Stockholm-based consultancy Raw Materials Group.
He said copper, used in power and construction, and iron ore, used in steel making, might be worst hit. Others suggest zinc could also suffer from an acute supply shortage.
Projects which had been experiencing difficulties before the economic downturn, or those in remote countries, especially if dependent on Chinese funding, could be vulnerable.
The crunch point could come as early as 2011 or 2012 once surplus inventories from the current downturn are worked off.
“You could have a situation two to three years down the road where there’s another commodities squeeze because companies haven’t spent as much as they should’ve done,” said Ian Morley, a director at fund manager Quantum.
Some analysts think it will take longer but either way mining majors with strong assets, such as BHP Billiton and Brazil’s Vale, will be better placed than most to benefit from the upturn when it comes.
Cutbacks and deferrals of major projects could hurt copper and zinc most, said independent consultant Angus MacMillan.
“Some of the projects deferred will be gone for good. Once again we’ll be short of concentrates when the economic cycle turns up,” he said, referring to mine production of both metals.
World copper prices have dropped by almost two-thirds from the July all-time high of $8,940 a tonne. Zinc prices are less than a quarter of their 2006 peak of $4,580.
Zinc producers have been swift to respond to plummeting prices, eroding the mountain of mine supply which was expected to cast a shadow over the market for at least a couple of years. Around 800,000 tonnes of zinc mine output could be lost in 2009.
Deliberate copper output cuts have been fewer, but come on top of a long list of unplanned losses, stretching beyond next year in some cases. And more are expected as prices start to eat into the cost curve.
“In copper, some of the projects are huge and it may take a long time for them to get going again if they stop now,” RMG’s Ericsson said.
Iron ore might also struggle to keep up with future demand, due to a possible lack of investment in infrastructure such as railways to transport the material from remote mine locations.
Analysts said it was tricky to identify specific big projects which could fall by the wayside.
Some said Rio Tinto’s already delayed Coega aluminium smelter project in South Africa might be cancelled. On Wednesday, the company withdrew as an investor in a Saudi aluminium project.
WINNERS AND LOSERS
But major mining firms will be best placed to benefit from the next metals boom, when some say prices will surpass recent historic peaks.
“Rio and BHP have got very good assets. They will probably escape the crisis much slimmer, healthier outfits,” MacMillan said, adding Vale was also well positioned due to its low-cost assets.
Depressed prices could put a halt to plans by steel producers, squeezed earlier by exorbitant raw material prices, to move upstream, buying into iron ore and coal mines.
This would bode well for big iron ore producers like BHP and Rio, whose projects are expected to proceed, although perhaps not as quickly as previously planned.
But other blue sky, greenfield iron ore projects, such as those dependent on Chinese funding would no longer go ahead.
“The commercial position of the Rio Tintos and the Vales will not be undermined,” independent consultant James King said, referring to iron ore.
“Their market share won’t be attacked and they’ll be adding capacity, so they’ll actually end up with a bigger market share,” he added.
For a factbox detailing cutbacks, closures and project delays and cancellations, FACTBOX-Mines and plants hurt by low prices, high costs please click on
(Editing by Sue Thomas)
(c) Reuters 2008. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.