Navigant Research’s report, Renewable Energy in the Mining Industry, summed up the state of the global mining business: “In the last decade, increased demand from countries such as China and other emerging economies pushed the price of many metals and minerals upward, which stimulated investment in the mining industry. More recently, the global economic downturn and the collapse in a number of metal and mined commodity prices forced the mining industry to scale back investment into new mine sites, reduce operating mine lives, and scale back their investment into more capital expenditure-heavy renewable energy.”
Since that report was published in the fourth quarter of last year, commodity prices have stumbled further, and the pressures on mining giants like Rio Tinto, BHP Billiton, and Vale Brazil have intensified.
On the surface, so to speak, it’s a great time to be an extractive company with worldwide operations in iron, copper, coal, and other minerals that are essential to the functioning of the modern industrialized economy. The rise of China and India has created a seemingly bottomless well of demand, particularly for iron ore for steelmaking; technological advancements have cut the costs of large-scale mining operations (while eliminating thousands of well-paying jobs); and governments in places desperate for economic growth, such as Mongolia and sub-Saharan Africa, have proven pliant to the demands of multinational mining corporations.
The Bottom of the Well
Rio Tinto’s profits in the first half of 2014 doubled from the same period a year before. BHP Billiton made $13.4 billion in profits in the 12 months leading up to June 2014. Brazil’s Vale, the world’s largest producer of iron ore, reported second quarter profits of $1.43 billion – slightly below Wall Street estimates but still a healthy increase over the year before.
A closer look, though, shows that big miners are playing a risky and ultimately unsustainable game. The term of fashion in the mining industry today is “de-diversification,” as mining companies sell off low-margin mines that they invested in during the commodities boom of 2002-2008, before the global financial systems crashed and growth in China ground almost to a halt. To keep profits up, the companies are slashing costs and adding new production – a short-term strategy that could spell long-term disaster.
Rio Tinto’s results “showed that the strategy of carving into costs while ramping up volumes that are being pursued by the major miners has worked to offset commodity price declines,” wrote Stephen Bartholomeusz in the Australian business publication, Business Spectator. “The key question – worth billions of dollars – is whether it will continue to work.”
Twilight In the Mines
Ultimately the dilemma facing miners of low-margin commodities like iron and coal is that as economies like China’s and India’s develop, they need less basic stuff. It takes less iron to make an iPhone than it does to assemble an airliner. Despite slowing demand, Vale plans to double its exports of iron ore to China over the next 5 years. Pumping more iron and coal into markets that need less of them is not a winning strategy over the long run. Goldman Sachs analysts have estimated that the rate of growth in the supply of iron ore is 3 times the rate of growth in demand. That’s a recipe for a glut and a price crash. Already, iron prices are on a downward slide.
Asian iron ore spot prices have fallen 31% this year, according to Reuters, and “the consensus is that they will remain below $100 for the foreseeable future as big miners such as BHP, Anglo-Australian rival Rio Tinto and Brazil’s Vale ramp up output even as Chinese demand growth weakens.”
As with coal, iron ore could be entering a downward spiral that could overwhelm the major miners as they narrow their focuses: “Iron ore risks becoming another coal,” remarked Reuters’ commodities columnist Clyde Russell, “where miners pursue output gains in order to lower costs, but in the end the resulting supply surplus just depresses prices even more, resulting in a no-win situation for producers.”
Like the coal era, the age of iron and steel is nearing its twilight. That’s not good if you’re a multinational mining outfit.
Tags: Finance & Investing, Industrial Innovations, Mining Industry, Smart Energy Program
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