Archive

Posts Tagged ‘demand’

Recycling & the Future of Mining

April 15, 2012 7 comments

For thousands of years the mining industry has supplied the world with the raw materials the growing population needed for ever increasing consumption. However, mining is not the only supplier of these raw materials. Next to the primary mining industry a secondary mining industry is growing: ‘urban mining’. The existing stock of materials in the urban environment is recycled more and more. 38% of iron input in the steel making process comes from scrap. The average ‘new’ copper cable contains some 30% recycled material. The more we recycle, the less we need to mine. As mining costs increase because ‘easy’ mineral deposits are becoming scarcer and as technological improvements make recycling more competitive, the impact of urban mining on the traditional mining sector grows. How does this change the perspectives of the mining industry in the long term? And which factors will play an important role in shaping this future?

Read more…

Mining Week 01/’12: New year – Same fear

January 7, 2012 Comments off

Top Stories of the Week:

  • Alcoa cuts aluminium production in fear of lower demand
    • Alcoa announced shutdown of 532,000 tonnes of smelting capacity at the top of the cost curve to lower production costs and improve competitiveness. The 12% reduction of capacity mainly hits operations in the USA.
    • Sources: Financial Times; Wall Street Journal; Alcoa news release
  • Potashcorp temporarily closes a third mine because of low demand
    • After recently temporarily closing down Lanigan and Rocanville mines, PotashCorp now decided to temporarily close Allan mine to because of lack of demand for fertilizer. The combined shutdown of the three mines results in approx. 1 million tonnes of potash, or some 10% of the company’s annual production.
    • Sources: Wall Street Journal; PotashCorp Q4 market analysis report; text
  • Unions in Canada and Zambia make their case for wage increases
    • A union representing copper mine workers in Zambia signaled the foreign miners will have to agree to higher salary increases than the average offer of 11% to prevent widespread strikes. At the same time Rio Tinto Alcan and Caterpillar are taking a strong position against unions in Canada by locking out union workers after expiry of the negotiation periods.
    • Sources: Wall Street Journal on Zambia; Wall Street Journal on Canada

Trends & Implications:

    The mining industry for the last 2 years has been and continues to be gripped by 2 paradoxical fears:

  • The fear for slowing demand due to the lack of recovery after the financial crisis – With the financial crisis over 4 years old already the typical macro-economic cycle of 6-9 years has clearly been disrupted. Governments and companies are still operating in ‘crisis fighting’-mode because demand does not pick up like after a regular economic downturn. Large investments are still undertaken because the belief in the long term demand driven by population growth and growth of average GDP/capita is unchanged, but at the same time companies are trying to manage short term lack of demand by scaling down or temporarily closing operations.
  • The fear for strikes and civil unrest resulting from struggling individuals facing mining companies that continue to realize high profits – Despite the financial volatility the commodity prices generally have remained high, making mining companies among the few companies in the world that continue to generate high profits. With people around the world facing the economic crisis and feeling its impact, friction develops between the rich companies and the less well off workers and neighbours.

©2012 | Wilfred Visser | thebusinessofmining.com

Iron ore to stay above $150, says Vale

July 12, 2011 Comments off

“The price of iron ore will remain above $150 a tonne for at least the next five years, according to Vale, the top miner of the ­commodity. The bullish prediction by Guilherme Cavalcanti, finance director of the mining group, is the latest contribution to a debate on the outlook for the iron ore market that has polarised analysts and investors.

Used to make steel, iron ore is the largest contributor to the profitability for the three largest mining groups: BHP Billiton, Vale, and Rio Tinto. And if Vale’s forecast is correct, the three companies’ shares would be expected to rise sharply.

Asked how long he expected prices to remain above $150 a tonne, Mr Cavalcanti said ‘at least the next five years’, arguing that miners would struggle to meet booming Asian demand. His prediction, in a video interview with the Financial Times, runs against consensus thinking.”

Source: Financial Times, July 6 2011

Observations:

  • Vale’s finance director explains he is not concerned about high inflation in China as mainly the consumer goods price inflation is high, while construction activity still ensures full offtake of Vale’s production.
  • Commodity swaps indicate the market expects prices to decline steadily over the coming years.

Implications:

  • While Vale expects Asian demand for iron ore to stay strong, the companies mainly sees restrained production because of delayed development projects (often because of environmental permitting issues) and weather influences as the key driver for high prices. Together with the high inflation in equipment costs and the relatively weak dollar iron ore prices will for a prolonged time be very elastic to supply.
  • Vale’s share price is lagging behind the price of its main competitors over the past years, resulting in higher cost of debt and reduced ability to perform share based M&A. With Vale’s large exposure to the iron ore price the company would benefit strongly from higher iron ore price expectations in the market.

©2011 | Wilfred Visser | thebusinessofmining.com

The Economist: the wacky world of gold

June 2, 2011 Comments off

“Gold is not like other commodities. … Yet gold miners’ shares have failed to keep pace. This is new. Gold and gold-mining shares used to rise and fall in lockstep. Over the past five years, however, the price of gold has trebled while the value of gold miners has merely doubled. Investors in firms that shift, crush and process rocks are more grounded, it seems, than those who invest in bullion.

As mines age, extracting gold gets harder and costlier. Ores give up less of the metal—average grades have fallen by 30% since 1999 according to GFMS, a consultancy. And ore must be hauled up from ever greater depths. Fuel is pricier. So, too, are labour and equipment, since the global minerals boom has driven up demand for miners and drills.

Finding new seams to replace depleted ones is becoming harder. Metals Economics Group, a mining consultancy, estimates that in 2002 gold miners spent $500m on exploration. By 2008 they were spending $3 billion but finding much less. All the easy gold has been mined already.”

Source: The Economist, June 2 2011

Observations:

  • The Economist identifies several reasons for the share price of gold mining companies to stay behind compared to the gold price: hedging limiting many miners benefits; increasing geopolitical risks; commodity diversification of gold miners; and the emergence of other methods to invest in gold.
  • The article mentions investment demand as the most important source of demand for gold. However, although this demand class is increasing in importance, demand for jewelry (mainly in India and China) still is the most important source of demand (see UBS-graphs below).

Implications:

  • The Economist fails to realize the importance of the supply side impact on the gold price. Miners are not the only source of gold in the market. Over 25% of supply is ‘scrap gold’, recycled from either jewelry or devices. Furthermore, historically the sales of gold reserves by central banks has strongly impacted the gold price.
  • Another important aspect of the gold supply dynamics not mentioned in the article is the development time lag: from investing in the search for gold to producing the first gold will easily take 5-10 years. The boom in gold exploration triggered by the high gold prices is now starting to result in supply increases, with production exceeding the previous 2001 peak. If gold prices stay high, the world will certainly see a slow further capacity increase.

©2011 | Wilfred Visser | thebusinessofmining.com

Rusal Net Profit More Than Triples

April 1, 2011 Comments off

“United Co. Rusal PLC said Thursday its net profit more than tripled last year on higher aluminum prices and a strong contribution from 25%-owned OAO Norilsk Nickel. The Russian aluminum giant plans to nearly double capital spending this year to boost capacity in the face of growing aluminum demand.

Rusal CEO Oleg Deripaska said in a statement the company’s strong net-profit growth was driven by significant increases in demand for aluminum and metal prices, and the company expects global demand for aluminium to grow 8% to 43.8 million metric tons this year. He also said aluminum prices will likely remain in a range of $2,500-$2,600 per ton until the end of the year, due to underlying demand and continuing weakness in the U.S. dollar. Prices were volatile last year, ranging from less than $2,000 per ton to as high as $2,500 per ton, he said.”

Source: Wall Street Journal, March 31 2011

Observations:

  • The largest part of annual profit ($2.44bln out of $2.87bln) comes from the share in Norilsk Nickel, a low-cost nickel producer.
  • Bauxite output of the company increased 4% to 11.8mln tons. Rusal operates 8 mines in Guinea and Guyana.

Implications:

  • Cost increase in both alumina and electricity has driven the industry’s break-even price to above $2,200/ton. Predicted demand increases faster than supply, potentially leading to further price increases. However, large trading stocks could supplement supply and keep the price relatively low for several years.
  • Increasing demand partly comes from copper substitution. Rusal benefits in the long term from the high copper price as manufacturers search for alternatives to copper wires.

©2011 | Wilfred Visser | thebusinessofmining.com

Oliver Wyman: Commodities bubble

February 15, 2011 Comments off

2015: Based on favorable demographic trends and continued liberalization, the growth story for emerging markets was accepted by almost everyone. However, much of the economic activity in these markets was buoyed by cheap money being pumped into the system by Western central banks. Commodities prices had acted as a sponge to soak up the excess global money supply, and commodities-rich emerging economies such as Brazil and Russia were the main beneficiaries. High commodities prices created strong incentives for these emerging economies to launch expensive development projects to dig more commodities out of the ground, creating a massive oversupply of commodities relative to the demand coming from the real economy. In the same way that over-valued property prices in the US had allowed people to go on debt-fueled spending sprees, the governments of commodities-rich economies started spending beyond their means. They fell into the familiar trap of borrowing from foreign investors to finance huge development projects justified by unrealistic valuations.

Once the Chinese economy began to slow, investors quickly realized that the demand for commodities was unsustainable. Combined with the massive oversupply that had built up during the boom, this led to a collapse of commodities prices. Having borrowed to finance expensive development projects, the commodities-rich countries in Latin America and Africa and some of the world’s leading mining companies were suddenly the focus of a new debt crisis. In the same way that the sub-prime crisis led to a plethora of half-completed real estate development projects in the US, Ireland and Spain, the commodities crisis of 2013 left many expensive commodity exploration projects unfinished.”

Source: Oliver Wyman: The Financial Crisis of 2015, February 2011

Observations:

  • Oliver Wyman, the international consulting firm, recently published a report in which it describes ‘the avoidable history’ of the next financial crisis. It foresees a bubble of commodity prices, caused by cheap money supply to developing countries in reaction to increased regulation in the developed world.
  • Wyman lists a number of prevention measures that should help to prevent the scenario sketched above from happening, removal of subsidies and scenario planning for development decisions being the most applicable to the mining sector.

Implications:

  • The factors Wyman does not include in its analysis are the long development lag of natural resources projects, causing supply to trail demand changes by several years, and competitive dynamics in the industry. Both factors might eventually strenghten the effects described, but a burst 2015 might be a too aggressive timeline.
  • Careful analysis of the sustainability of demand growth in Asia, in particular in China, is crucial for the investment decisions for long term projects in all mining firms, not only the companies that have Chinese customers. Once Chinese demand slows down the global fulfillment dynamics will change, making the low cost suppliers (totalling production and transportation costs) survive.

©2011 | Wilfred Visser | thebusinessofmining.com

Steel price rise stokes inflation concerns

January 17, 2011 Comments off

“The price of steel has risen more than a third in two months, adding to global inflationary pressures as food and energy costs are also soaring. Floods in Queensland have severely disrupted global supplies of coking coal, a major steelmaking ingredient, prompting a scramble among manufacturers to stock up on steel.
That has pushed the price of benchmark US hot-rolled coil steel 37 per cent higher since early November to a two-year high of $783 a tonne, said CRU, a consultancy.

Spot cargoes of coking coal have traded as high as $350 a tonne – up 55 per cent from quarterly contracts agreed at $225 just a few weeks ago. Iron ore, the other major ingredient in steel, is rapidly rising towards record high prices, with benchmark grades delivered to China up 20 per cent since the start of November at $178.30 a tonne.”

Source: Financial Times, January 16 2011

Observations:

  • In the interview on the FT-site Edward Hadas places the coal supply disruptions in Queensland due to weather conditions in the context of global commodity price increases over the past months. Key drivers for the continuing price increase are the increasing demand from China and India; the access to cheap money that fuels the demand; and the general shortage on the supply side, which has temporarily been increased by flooding.
  • Hadas argues that only some 20% of the global commodity trade volumes are affected by the weather conditions. This includes commodities like coffee and tea, for which production is much more susceptible to weather conditions than for mined commodities.

Implications:

  • Although the extreme weather conditions have a definite short term impact on coal and iron ore prices, they will not change the pricing in the long term. However, increased occurence of extreme weather conditions due to climate change will certainly make global commodity markets more volatile.
  • The transition to a quarterly pricing system for iron ore will enable the iron ore miners to rapidly pass on increased costs to the steel makers, further increasing the raw material costs.

©2011 | Wilfred Visser | thebusinessofmining.com

%d bloggers like this: