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Miners scale back production
Falling demand from global industry and ongoing operational issues have pegged back miners’ expansion plans and caused many to mothball mines in Africa
Market prices in many metals have fallen significantly in the past few months as industrial demand cools, and with operating costs remaining high, some mining companies, including BHP Billiton, Camec and Lonmin have been cutting output.
BHP said in early December that it would scale back production at its Samancor manganese joint venture in South Africa due to the contraction in the steel market. In late November 2008, Camec completely suspended its copper and cobalt operations in the Democratic Republic of Congo, citing a sudden decline in demand from the Chinese customers who have been sustaining the metal’s high price regime. Others have taken similar measures.
“What is interesting about this right now is that we’ve seen cutbacks happening much faster than we’ve seen in the past. If you go back to 1999 or 2001, we had cutbacks, but they took a long time to come through,” says George Cheveley, a metals and mining specialist at Investec Asset Management. What has changed since then is that there is not a ready supply of credit, he suggests, which inhibits miners’ ability to refinance. Secondly, he says, “I think the industry looks back at 2001, when the cutbacks were made and – rightly or wrongly – the price then recovered very strongly.”
While the industry is by no means consolidated, it is certainly more so now than then, which means that the large miners can shut down mines to manipulate supply without harming their overall position. “We’re seeing it more so in industries such as steel, where we’ve seen real leadership from Arcelor-Mittal, cutting production rapidly because of weak demand,” Mr Cheveley says.
To attribute the cutbacks to prices alone would be to oversimplify the issue, Mr Cheveley says. “Price is clearly one of the catalysts here, and the fall in prices clearly ruined a lot of returns and forced people to think, but in a sense, a lot of those people were already struggling in terms of production… A number of these cutbacks, I would say, are not entirely voluntary.”
A number of the mines have been experiencing production problems for some time, due in part to their owners haste in trying to start operations to catch the high prices. To some extent, Mr Cheveley suggests, companies are blaming the copper price for delays that were already there. “There’s been a number of people trying to get on stream as quickly as possible and, certainly in some of these mines, underestimating generally the technical difficulties they would face mining these things,” he says. “Obviously the copper price falling is part of the reason, but it’s not the whole reason.
“Obviously if you’re having production problems you don’t get the volumes and your costs go up, and at this price it’s not economical. If they were producing at the proper volumes, they would still be producing.”
Miners’ appetite for investment in the Democratic Republic of Congo, in particular, has slowed. Continued questions over the outcome of the forthcoming mining review and the possibility that existing claims will be disputed mean that the risk–reward profile has shifted unfavourably. “When copper’s $8,000, you’ll probably take that risk. When it’s $3,500 per tonne, you’re going to be a little bit more wary.”
Tempering the fall in metal prices is a concurrent slide in input prices, which mean that some mines may still be able to operate at a small profit despite the depressed market. Oil prices, which have a significant effect on the cost of transport and operations, have fallen from highs in excess of $150 to under $50 in the past few months. Sulphur, which is used in the leaching process, has fallen to a fifth of its price early in the year. The weakening dollar, too, has helped some international producers. Additionally, as Mr Cheveley notes, $3,500 per tonne is still considered a very high price by anyone who has been in the market for more than three years.
