Posts Tagged ‘price’

Mining Week 31/’12: Falling prices, falling profits

July 29, 2012 Comments off

Top Stories of the Week:

  • Vale’s profits down on lower prices
    • Vale reported profits below analyst estimates and 60% down versus the same quarter last year. The benchmark price of iron ore has dropped to $120/wmt, at part with the price floor identified by the company last quarter.
    • After the first quarter Vale reported a 45% drop in year on year profits, driven by both volumes and prices
    • Sources: Vale press release; Financial Times
  • Anglo, Teck, Gold miners down on lower prices
    • Lower commodity prices and rising costs resulted in earnings drops of 55%, 65%, and 35% for Anglo, Teck, and Barrick.
    • Anglo announced delay of its flagship development iron ore project in Brazil, Barrick announced large cost overruns for its Pascua Lama project in Argentina, and Teck recently tuned back on a large copper expansion project in Chile. They are all reviewing the balance between project investments and shareholder returns.
    • Sources: FT on Anglo; FT on Teck; WSJ on Barrick
  • Anglo pays $0.6bn for controlling stake in Mozambique coking coal project
    • In a rare move amidst cancellation of development projects across the industry Anglo made the move to buy 59% of the 1.4Bt Revuboe coal project in Mozambique. The project is a JV with Nippon and Posco and is planning to start production of 6-9Mtpa by September 2013.
    • Sources: Financial Times; Anglo press release

Trends & Implications:

  • Dropping prices + increasing costs = review of development. Most non-agricultural commodity price indices have dropped 20-40% over the past year. Where a year ago the focus of most miners was to bring new projects online as fast as possible, attention has shifted to cost containment and ‘disciplined capital investment’. The focus on building projects is stretching capacity of contractors, making capital and operating costs increase rapidly. As a result the projected returns of projects deteriorate, forcing companies to reconsider their portfolio of development plans.

©2012 | Wilfred Visser |

Breaking down BHP Billiton’s iron ore production costs

September 29, 2011 2 comments

BHP Billiton organized a site tour of its Western Australia Iron Ore operations this week, providing valuable information about its production costs:

Source: BHP Billiton Site Tour Presentation, September 27 2011


  • BHP positions itself in the cost curve around $39/t CIF. Average iron ore price for the year ended June 2011 was $163/t, resulting in a 76% operating margin.


  • Combining the data from the two charts above, BHP’s breakdown of total iron ore costs of $39/t CIF China are as follows:
    • US$9.4/t – Contractors
    • US$7.0/t – Secondary taxes & royalties
    • US$4.3/t – Freight, distribution & demurrage
    • US$3.5/t – Depreciation, depletion & amortization
    • US$3.1/t – Fuel & energy
    • US$2.7/t – Raw materials & consumables
    • US$2.7/t – Labor incl. consultants
    • US$0.4/t – Exploration
    • US$5.9/t – Other

©2011 | Wilfred Visser |

China intensifies purchases of copper

September 1, 2011 Comments off

“Chinese companies and investors are stepping up their purchases of industrial commodities such as copper, in a show of confidence in the global economy that stands in contrast to the turmoil in western markets. The wave of buying is providing support for metals and minerals prices after commodities prices fell this month at worries about a double-dip. Senior executives at trading houses, mining companies and banks said Chinese consumers had used the recent drop in prices to rebuild stocks.

‘China is significantly less pessimistic relative to people in the western world,’ said Raymond Key, head of metals trading at Deutsche Bank. ‘On dips they are restocking, especially in copper.’ An executive at an important Chinese trading house added: ‘There is no doubt some traders have been buying [copper] recently.’”

Source: Financial Times, August 30 2011


  • The global copper trade is transparent because of the unknown size of stocks at various points in the process, as indicated below. Especially the size of ‘bonded warehouse stocks’, which are often controlled by governments, can only be estimated.
  • Traders estimate the size of the government controlled bonded warehouse stocks to have halved over the past months, leading to a high demand for copper as stock have to be rebuilt.


  • The copper trading chain shows the effect of the bull whip syndrome: small changes at the end of the chain result in large impact at the start because each player tries to anticipate the next moves. Copper price decreased as consumers were reducing stocks, trying to avoid buying on the top of the market. At the same time players all along the chain try to reduce stocks and inventory to minimize working capital. As soon as shortage of stocks forces consumers to start buying, prices shoot up because of a lack of reserves along the chain.
  • The Chinese State Reserve Bureau (SRB) holds large stocks in bonded warehouses, but it is unknown how large these stocks really are. The SRB can use these stocks to influence global prices and at the same time the metal stocks are used as a means to reduce holdings of foreign currencies by buying physical stocks. Overall the controlled stocks should be expected to reduce spikes in demand and supply, as a relatively stable copper price is important for China’s manufacturing industry.

©2011 | Wilfred Visser |

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


  • 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.


  • 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 |

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


  • 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).


  • 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 |

Iron ore’s stability keeps miners strong

May 30, 2011 Comments off

“After the recent carnage in commodities markets, iron ore stands out for its price stability. The commodity used in steelmaking has been trading at around $180 a tonne for most of the month, just as the costs of raw materials ranging from crude oil to copper and cotton have gyrated wildly.

Prices peaked in the first quarter above $190 a tonne – a record high – and have been trading in a narrow band between $185 and $175 for most of the last few weeks. This relative stability suggests that physical demand for commodities, particularly from China, remains well supported. It also suggests that mining companies continue to struggle to bring projects in on time and on budget to meet the increase in consumption.”

Source: Financial Times – Commodities Note, May 19 2011


  • The iron ore pricing mechanism was changed last year, moving to a spot-price linked price instead of the historic annual benchmark price. As a result the miners have gained more flexibility in setting contracts.
  • Iron ore price increased threefold over the last years, with Asian growth and supply constraints mentioned as the most important drivers.


  • Both Rio Tinto and BHP Billiton are planning to increase capacity of iron ore mines in Western Australia significantly, but supply is expected to be short for at least an other couple of years. As Indian ore will more and more be used for domestic steel production the long term prospects of Australian exports are good.
  • The high ore price will trigger development of projects with relatively high cost base, breaking even at prices far above the $50/tonne level. Low cost operations will be operated at maximum capacity while focus at these new high cost operations will be on cost control.

©2011 | Wilfred Visser |

Tata Steel Profit Increases by 72%

May 26, 2011 Comments off

“Tata Steel Ltd. Wednesday reported a 72% rise in quarterly consolidated net profit from a year earlier due to higher product prices and robust sales growth at its India business, as well as a one-time gain of $561 million on the sale of a plant in Teesside, U.K. The world’s seventh-largest steelmaker by volume said profit for the fourth quarter ended March 31 rose to $937 million, up from $546 million.

Consolidated sales rose 23% to $7.59 billion from $6.17 billion in the fourth quarter, but the earnings margin before interest, taxes, depreciation and amortization shrank to 13.9% from 19.4%. … The Indian operations posted sales of $1.87 billion, with the sales volume at 1.7 million tons. Comparative figures were not provided.

Looking ahead, chief financial officer Koushik Chatterjee said at a press conference that the company’s operations, especially those in Europe, will continue to face cost pressures from escalating raw materials prices, such as iron ore and coking coal. “

Source: Wall Street Journal, May 26 2011


  • Europe is Tata’s biggest market, but the largest part of profits come from India, where the company achieved over $400/t EBITDA, compared to less than $100/t EBITDA in other regions. Overall EBITDA margin stands at 14%.
  • Tata expects increasing Indian government expenditure to stimulate the economy as a key driver for growth in the near future.


  • The good news for Tata and other steelmakers is that the company has managed to offset the increasing raw materials cost by increasing the price of its products in emerging markets. Though higher steel prices could slow the growth of emerging economies (which China’s government is trying to do anyway), the increase in steel prices is important for steel makers in the region to escape the cost pressure from higher iron ore, coal, energy, and employment costs.
  • Tata is trying to find a new balance in its global operations. It announced a restructuring of its European long products division in order to make it profitable and sold its Teesside plant in the UK. The company tries to strengthen its position in India to benefit from the growth of the Asian market, but is at the same time struggling with the strong and hardly profitable presence in Europe’s mature market.

©2011 | Wilfred Visser |

Vedanta delivers strong results, but faces operational challenges

November 12, 2010 Comments off

“The company reported revenues of US$4.6 billion and an EBITDA of US$1.3 billion in the first
half of this year due to higher volumes and realisations across all operations as compared with
the corresponding prior period. Operating profit was US$985 million and attributable profit
was US$337 million, a 39.4% share of net income.

US$479 million of free cash flow was generated after investing c. $1.1 billion in growth capex.
Net debt and gearing were $1.6 billion and 11.6% respectively. Gearing is expected to be less
than 40% after completion of the Cairn India acquisition, and is expected to reduce quickly
given the inherent cash generation of the group.”

Source: Vedanta Interim Results Presentation, November 11 2010


  • Vedanta, the major Indian diversified mining company (although run from London), posted record profits, mainly driven by increases of zinc and iron ore prices. EBITDA margin of around 40% is lower than for some international competitors, but reflects the broad base of small mines the company owns in India.
  • The company is well positioned to be the supplier of choice for the rapidly growing Indian industry. The extension of its business into oil & gas and utilities helps the group to be rather self-sufficient, making it less dependent from poor national infrastructure than international competitors trying to enter the country


  • Upon analysis of the increase of EBITDA the results are not as strong as initially expected. The increase is fully explained by increase of commodity prices (see figure below). Volumes only increased a little bit, completely driven by iron ore volumes. In terms of cash costs, royalties and other comparable items the performance in the 1st half of fiscal year 2011 was actually worse than in the 1st half of fiscal year 2010.
  • The EBITDA breakdown is partly explained by the challenges the company is facing to comply with the rapid changes in regulatory environment in India. The company is struggling to get new assets up to speed as litigation for environmental and ethical/legal issues is forcing it into defensive positions. Apart from the iron ore operations, the low productivity in its mines does not seem to improve.

©2010 | Wilfred Visser |

World Steel Association expects record 2010

October 5, 2010 Comments off

“Stronger-than-expected increases in steel demand in Europe, Japan and the former Soviet Union are propelling the global steel industry to a robust recovery this year, according to forecasts released by the World Steel Association. The association – the main trade body for the sector – said on Monday that global consumption of the metal would increase by 13.1 per cent in 2010 to a record level, above a forecast of 10.7 per cent made in April.

Next year demand for all grades of steel – the most widely used industrial material, which goes into a range of sectors from cars to toy manufacturing – is likely to rise by a more modest 5.3 per cent to hit a fresh record of 1.34bn tonnes.”

Source: Financial Times, October 4 2010


  • Last week both the CEO of ThyssenKrupp and the head or the iron ore division of Vale announced similar expectations about the demand for iron ore. Vale expects the price of ore to remain high, although analysts expect the price to drop by approx. $15/t.
  • In June of this year various steel producers warned for potential overcapacity in the industry, caused by low growth expectations for China. However, most steel makers have gained confidence that the risk of a double dip recession is limited.


  • This year’s change of the iron ore pricing mechanism to a system linked to the spot price of the ore is an incentive to business leaders to try to influence the spot price. Published expectations on the demand and supply of ore and steel by various companies can be seen as part of the game of influencing the price and the strategy of suppliers and customers.
  • The effect of announcing high demand expectations by steel makers works in two directions: it is a signal to the mining industry to step up production, which causes price of ore to drop in the long run; at the same time it might increase the price of ore in the short term as demand drives the price up.

©2010 | Wilfred Visser |

Arcelor raises steel price; Nippon steel faces higher costs

July 28, 2010 Comments off

“ArcelorMittal, the world’s largest steel maker, said it is going to increase its prices for steel by 10% this year, even as it expects steel demand to weaken throughout most of the world.

‘We need a 10% price increase for spot business in order to replicate our profit level in the second quarter,’ said Chief Executive Lakshmi Mittal.”

Source: Wall Street Journal, July 28, 2010

“Nippon Steel Corp. said Wednesday that a rebound in steel demand, particularly in Asia, pushed it back to the black in its fiscal first quarter, but soaring iron ore and coal costs ate into its profitability and are clouding its earnings recovery prospects. …

Nippon Steel is not alone in contending with high input costs. JFE Steel Corp., Japan’s No. 2 steel maker, on Tuesday also reported its net profit fell 41% from the previous quarter.”

Source: Wall Street Journal, July 28, 2010


  • Change in pricing system of iron ore has allowed miners to pass on price increases to steel makers. As many steel makers have fixed prices with customers in medium term contracts, profits are reduced by the increase of raw materials that can not be passed on to customers immediately.
  • Only last month various steel makers warned for steel price reductions because of the threat of overcapacity in the industry. At the same time, warnings for increasing steel price volatility appear to become reality, as long term price contracts are replaced by spot price-based pricing.


  • Many competitors of Arcelor Mittal will follow in increasing steel prices. As the construction industry is recovering from the crisis, increasing prices will impact demand heavily, causing output levels to fall and overcapacity to increase further. Therefore, the steel price increase can be expected to be short-lived.
  • Increasing seaborne iron ore prices mainly impact steel makers that are not vertically integrated. Arcelor Mittal is hit less than other Indian producers as they are pursuing upward integration aggressively and are less dependent on seaborne trade from Australia than Nippon Steel and many Chinese companies.

©2010 | Wilfred Visser |

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