Currently the quite a few export markets specially raw materials and long segments are showing a kind of very strange and rapid growth. Some products added more than USD 100 just in the couple of last days.The market looks like a ball that felt down on the ground and start to jump…but is seams that each following jump will be smaller than previous one.Coal mining giant, Peabody Energy Corporation has posted a more than tenfold increase in third quarter profit on a 59% YoY increase in revenues driven by strong volumes and higher pricing. It also raised its financial forecast for the fiscal 2008.
Peabody Energy earned USD 369.6 million for the third quarter, up from USD 32.3 million in the last year period. Income from continuing operations was USD 377.1 million, higher than USD 55 million per share in the comparable prior year quarter. EBITDA for the quarter was USD 609.8 million, up by 190% YoY from USD 210 million in the prior year.
Third quarter revenues were USD 1.91 billion, up by 59% YoY from USD 1.20 billion. Ten Wall Street analysts expected revenues of USD 1.68 billion. Peabody sold a volume of 66 million tonnes of coal in the latest quarter, up by 6% YoY from 62.1 million tonnes a year ago.
Coal companies have benefited from rising North American coal prices over the past several quarters, benefiting from increasing global demand and supply disruptions. Revenue from the company's US mining operations rose to USD 930.7 million from USD 805.5 million in the prior year quarter. Australian revenue soared to USD 789 million from USD 307.6 million a year ago. EBITDA from mining operations nearly tripled, and Trading and Brokerage increased 168%. Meanwhile, operating profit rose 324% to USD 490.2 million.
For the January to September 2008 period, Peabody reported net income of USD 660.2 million as compared to USD 228.5 million. Revenues increased to USD 4.71 billion from USD 3.38 billion in the prior year period.
Looking forward, for the fiscal year 2008, it raised its earnings from continuing operations guidance to a range of USD 3 to USD 3.25 per share from earlier estimated range of USD 2.50 to USD 3 per share. Seventeen Street analysts expect earnings of USD 2.86 per share. The current guidance range of USD 3 to USD 3.25 per share represents an increase of as much as 103% from 2007.
Peabody now expects 2008 EBITDA in a range of USD 1.75 billion and USD 1.85 billion, as much as 92% higher than 2007. Earlier, it expected full year EBITDA in the range of USD 1.6 billion to USD 1.8 billion.
Mr Richard Navarre president & chief commercial officer of Peabody said that "While there is uncertainty in today's economy, any easing of demand growth is likely to be offset by diminished global coal supply. Supply challenges around the world and lack of capital to respond to market shortages will continue to drive a tight global supply demand balance for coal. In addition, we believe that the long term coal demand profile is very strong and will continue to be led by emerging economies."
Peabody noted that, currently, approximately 300 gigawatts of new coal fueled generation is under construction around the world and expected to come on line over the next several years, requiring up to 1 billion tons of annual coal supply.
It added it has 10 million to 20 million tons of US production un priced for 2009, and 75 million to 85 million tonnes for 2010. Peabody said it has 6 million to 7 million tonnes of Australian based metallurgical coal available to be priced for the last three quarters of 2009 and 10 million to 11 million tonnes for 2010. Un priced Australian thermal coal volumes include 6 million to 7 million tonnes for the last three quarters of 2009 and 12 million to 13 million tons for 2010.
Monday, November 17, 2008
Sunday, November 16, 2008
Let us take the charges seriously !
THE iron ore mining sector in Bellary district in Karnataka and the expanding web of illegal and corrupt practices that sustains it are finally to be brought under official scrutiny.
The explosion in iron ore mining, powered by a spurt in the international prices of iron ore in the past four years, has resulted in the overnight enrichment of mine owners in the area.
Of the 54 mining lease-holders in the reserve forest areas of Bellary division, the majority got their leases between the 1960s and the 1980s. Another 57 received temporary leases after 2004 from the government on patta or revenue lands.
Following the mining boom, there has been wholesale violation of laws governing mineral extraction and environmental protection by sections of the lease-holders. They have escaped prosecution largely by bribing the administrative and law-enforcing machinery at the district and State levels.
The mining sector escaped any serious official investigation in the past. It was only when the weight of the scandal threatened the very survival of the present coalition government headed by H.D. Kumaraswamy of the Janata Dal (Secular), that the Chief Minister ordered an inquiry into all aspects of illegality in the mining sector.
The allegations made by G. Janardhana Reddy, a Bharatiya Janata Party (BJP) Member of the Legislative Council (MLC) and a wealthy mine owner himself, that bribes totalling Rs.150 crores were collected from mine owners by Forest Minister C. Chennigappa on behalf of the Chief Minister rocked the government and dominated the proceedings of the Legislative Assembly and the Legislative Council for several days.
JOSH CHIN
FAMILIES OF MINE workers and their makeshift homes. Their living quarters have no water, electricity or sanitation.
The BJP is a constituent of the ruling coalition. Reddy and the Opposition Congress demanded an inquiry by the Central Bureau of Investigation (CBI) into the allegations. The Chief Minister has instead appointed a commission of inquiry, to be headed by U.L. Bhatt, a former Chief Justice of the Madhya Pradesh and Assam High Courts. The commission will file an interim report in two months and the final report in six months.
Terms of reference
The commission has been asked to identify all the fraudulent activities relating to mining from January 1, 2000, until the present, the "systemic distortions for high-profit margins" in the mining sector.
In particular, it has been asked to look into two issues. The first is the outcome of the government order, issued by the S.M. Krishna government in March 2003, to dereserve 11,620 acres (4,648 hectares) of government land for private mining.
The second relates to the joint venture contracts entered into by Mysore Minerals Ltd (MML) that are alleged to have favoured select individuals and companies by arbitrarily allotting iron ore mines and iron ore stocks at rates far below the market price.
"There have been complaints of certain influential individuals who were part of the power structure within the government, who by manipulating the records and interfering in the affairs of MML caused huge losses to the corporations and the State", the notification says. The Commission is also to look into the practice of issuing transport permits for illegal mines on government land.
Profits and power
Profits from mining have gone through the roof in the recent mining boom. "As per a rough estimate, the 50-odd operating leaseholders (lessees) of Bellary district had earned a total profit of around 30,000 to 35,000 million [3,000 crores to 3,500 crores] rupees in the last financial year," an official note prepared by a senior district police officer states. Approximately 30 million tonnes of iron ore was extracted in the district in the last financial year.
The profit that a lease-holder makes for every tonne of ore depends on the market price of the ore. "As a thumb rule," the note says, "it can be safely stated that a leaseholder makes profit in the range of $20 to $40 per tonne of iron ore fines (62.5 plus grade) and Rs.400 to Rs.600 per tonne of iron ore lumps."
This wealth has created a new class of businessmen-politicians whose millions have given them considerable clout in State politics and within the three major political parties in Karnataka. The BJP is a case in point.
If the election campaign of BJP leader Sushma Swaraj set the momentum for the party's growth in Bellary, the wealth from mining appears to have sustained it thereafter. The party has broken the Congress stranglehold over the district. Several of its elected representatives either are mine owners or are in the mining business.
The Member of Parliament from Bellary, Karunakara Reddy, is from the BJP, as are several of the MLCs and the Members of the Legislative Assembly (MLAs) from the area. B. Sriramulu is the BJP MLA from Bellary city, Anil Lad from Kudligi, and Somalingappa from Siruguppa. The BJP has a majority in the Bellary City Corporation, and in the Bellary, Siruguppa and Kudligi taluk panchayats.
The allegations over pay-offs made under coercion by mine owners to members of the JD(S) threaten to destabilise not just the coalition but the BJP as well. It has brought to the surface the differences between the two factions in the BJP, the one led by Deputy Chief Minister B.S. Yediyurappa and younger leaders like Reddy, whose swift rise in the party is attributed to his financial clout.
Reddy was suspended from the party for failing to prove his charges of corruption against the Chief Minster. He nevertheless remains defiant. "I stand by my charges, I am a loyal worker of the party, and the State government did not get the clearance from the central leadership before suspending me," he told Frontline.
The commission of inquiry will not have to start from scratch in its investigations as the contours of corruption and illegality within the mining sector in Bellary has already been laid out in official notings and media reports.
According to the investigations of a police officer in the district, there are four types of illegalities that are commonly committed. The first is when mining operations are carried out without government lease or permission. The second is when mining operations are carried out in contravention of the terms and conditions of the lease, as for example when mine owners encroach on areas outside the lease agreement, or excavate more ore than permitted in the lease agreement.
The third illegality is the theft of extracted minerals belonging to the government or a lessee. And lastly, there are illegalities in transportation and in the violation of pollution control laws.
According to data from the office of the Conservator of Forests in Bellary, there are just 54 official mining leases that are in operation in reserved forest areas - "3,800 hectares out of a forest area in Bellary district of 30,000-odd hectares," C. Jayaram, Conservator of Forests, Bellary Division, said.
"There are only small violations in our jurisdiction, and we have taken action on them," he said.
A report prepared by Chennigappa in March 2006, soon after he assumed office, suggests otherwise. According to the report, there were massive violations of the Karnataka Forest Act in Bellary that were causing a "huge loss of revenue (such a loss would run into crores if a thorough enquiry is done)". His report accuses the operators of several mines of "very serious violations of various mining conditions/Forest Conservation Act/ Karnataka Forest Act/ Environmental Protection Act/ Mines and Minerals Acts, etc".
According to Mathew Guru, the owner of a large transport business in Bellary, the mining boom has benefited not just mining lease-holders but the district as a whole as it has given jobs to lakhs of people.
"On an average the cost of mining is between Rs.200 and Rs.250 a tonne. The price of C-ore and fines (iron ore dust) is Rs.1,400 a tonne at the mines and Rs.2,700 if transported to the harbour. Most mine owners in Bellary are worth more than Rs.1,000 crores," he said.
RED DUST
Roughly 7,500 lorries move out of Bellary daily carrying ore and fines (ore dust) to the ports in the east and the west. The dust these lorries generate settles on everything.
At the Government Model Higher Primary School in Taranagar, Sandur taluk, respiratory disorders among children in the last five years have increased substantially because of the dust that is thrown up by the lorries that ply up and down the road in front of the school, according to Sundaresh Kumar, the physical instruction teacher in the school.
"At least 2,000 lorries pass in front of the school every day," he said. "By the evening the children are covered in red dust."
Even as the mine owners turn from millionaires to billionaires, the mine workers - thousands of migrant agricultural workers among them - labour under the most appalling conditions. In the smaller and most often illegal "float-ore" mines, working families dig shallow pits to bring up lumps of iron ore that is then broken down by hand. At larger mines, they operate heavy machinery such as excavators and dumpers.
They drive the endless convoys of ore-laden lorries from work sites to ports in Mangalore, Karwar, Vishakhapatnam and Chennai. They work for over 12 hours a day in the lung-choking environment created by swirling ore-laden clouds of red dust that permeate even the small hovels that entire families crowd into to sleep. Their living quarters have no water, electricity or sanitation.
"There was no work for us in our village in Kushtagi [Raichur taluk]: here we get Rs.5 for every putti [iron basin] of ore we break down," said Sharadamma, an emaciated young mother of three, as she and her friends Padma and Shara pick up dry twigs from the roadside near Subburayanahalli village in Sandur, a region whose forested hillsides and fertile valleys are being fast denuded by uncontrolled private mining. She can break roughly 10 puttis on a good day of work. "The rate used to be Rs.8 for a putti, but now that so many people want work, the price has been pushed down. We are our own enemies."
The biggest wrongdoing committed by mining companies, with the exception of state-owned companies, is the gross exploitation of labour, including children, the class that creates their wealth. This is an issue that does not find a mention in the terms of reference of the Bhatt Commission of Inquiry, nor in any of the official reports on the mining sector. A report that investigates mining illegalities but which does not investigate the violations of labour rights will, indeed, be a partial one.
The explosion in iron ore mining, powered by a spurt in the international prices of iron ore in the past four years, has resulted in the overnight enrichment of mine owners in the area.
Of the 54 mining lease-holders in the reserve forest areas of Bellary division, the majority got their leases between the 1960s and the 1980s. Another 57 received temporary leases after 2004 from the government on patta or revenue lands.
Following the mining boom, there has been wholesale violation of laws governing mineral extraction and environmental protection by sections of the lease-holders. They have escaped prosecution largely by bribing the administrative and law-enforcing machinery at the district and State levels.
The mining sector escaped any serious official investigation in the past. It was only when the weight of the scandal threatened the very survival of the present coalition government headed by H.D. Kumaraswamy of the Janata Dal (Secular), that the Chief Minister ordered an inquiry into all aspects of illegality in the mining sector.
The allegations made by G. Janardhana Reddy, a Bharatiya Janata Party (BJP) Member of the Legislative Council (MLC) and a wealthy mine owner himself, that bribes totalling Rs.150 crores were collected from mine owners by Forest Minister C. Chennigappa on behalf of the Chief Minister rocked the government and dominated the proceedings of the Legislative Assembly and the Legislative Council for several days.
JOSH CHIN
FAMILIES OF MINE workers and their makeshift homes. Their living quarters have no water, electricity or sanitation.
The BJP is a constituent of the ruling coalition. Reddy and the Opposition Congress demanded an inquiry by the Central Bureau of Investigation (CBI) into the allegations. The Chief Minister has instead appointed a commission of inquiry, to be headed by U.L. Bhatt, a former Chief Justice of the Madhya Pradesh and Assam High Courts. The commission will file an interim report in two months and the final report in six months.
Terms of reference
The commission has been asked to identify all the fraudulent activities relating to mining from January 1, 2000, until the present, the "systemic distortions for high-profit margins" in the mining sector.
In particular, it has been asked to look into two issues. The first is the outcome of the government order, issued by the S.M. Krishna government in March 2003, to dereserve 11,620 acres (4,648 hectares) of government land for private mining.
The second relates to the joint venture contracts entered into by Mysore Minerals Ltd (MML) that are alleged to have favoured select individuals and companies by arbitrarily allotting iron ore mines and iron ore stocks at rates far below the market price.
"There have been complaints of certain influential individuals who were part of the power structure within the government, who by manipulating the records and interfering in the affairs of MML caused huge losses to the corporations and the State", the notification says. The Commission is also to look into the practice of issuing transport permits for illegal mines on government land.
Profits and power
Profits from mining have gone through the roof in the recent mining boom. "As per a rough estimate, the 50-odd operating leaseholders (lessees) of Bellary district had earned a total profit of around 30,000 to 35,000 million [3,000 crores to 3,500 crores] rupees in the last financial year," an official note prepared by a senior district police officer states. Approximately 30 million tonnes of iron ore was extracted in the district in the last financial year.
The profit that a lease-holder makes for every tonne of ore depends on the market price of the ore. "As a thumb rule," the note says, "it can be safely stated that a leaseholder makes profit in the range of $20 to $40 per tonne of iron ore fines (62.5 plus grade) and Rs.400 to Rs.600 per tonne of iron ore lumps."
This wealth has created a new class of businessmen-politicians whose millions have given them considerable clout in State politics and within the three major political parties in Karnataka. The BJP is a case in point.
If the election campaign of BJP leader Sushma Swaraj set the momentum for the party's growth in Bellary, the wealth from mining appears to have sustained it thereafter. The party has broken the Congress stranglehold over the district. Several of its elected representatives either are mine owners or are in the mining business.
The Member of Parliament from Bellary, Karunakara Reddy, is from the BJP, as are several of the MLCs and the Members of the Legislative Assembly (MLAs) from the area. B. Sriramulu is the BJP MLA from Bellary city, Anil Lad from Kudligi, and Somalingappa from Siruguppa. The BJP has a majority in the Bellary City Corporation, and in the Bellary, Siruguppa and Kudligi taluk panchayats.
The allegations over pay-offs made under coercion by mine owners to members of the JD(S) threaten to destabilise not just the coalition but the BJP as well. It has brought to the surface the differences between the two factions in the BJP, the one led by Deputy Chief Minister B.S. Yediyurappa and younger leaders like Reddy, whose swift rise in the party is attributed to his financial clout.
Reddy was suspended from the party for failing to prove his charges of corruption against the Chief Minster. He nevertheless remains defiant. "I stand by my charges, I am a loyal worker of the party, and the State government did not get the clearance from the central leadership before suspending me," he told Frontline.
The commission of inquiry will not have to start from scratch in its investigations as the contours of corruption and illegality within the mining sector in Bellary has already been laid out in official notings and media reports.
According to the investigations of a police officer in the district, there are four types of illegalities that are commonly committed. The first is when mining operations are carried out without government lease or permission. The second is when mining operations are carried out in contravention of the terms and conditions of the lease, as for example when mine owners encroach on areas outside the lease agreement, or excavate more ore than permitted in the lease agreement.
The third illegality is the theft of extracted minerals belonging to the government or a lessee. And lastly, there are illegalities in transportation and in the violation of pollution control laws.
According to data from the office of the Conservator of Forests in Bellary, there are just 54 official mining leases that are in operation in reserved forest areas - "3,800 hectares out of a forest area in Bellary district of 30,000-odd hectares," C. Jayaram, Conservator of Forests, Bellary Division, said.
"There are only small violations in our jurisdiction, and we have taken action on them," he said.
A report prepared by Chennigappa in March 2006, soon after he assumed office, suggests otherwise. According to the report, there were massive violations of the Karnataka Forest Act in Bellary that were causing a "huge loss of revenue (such a loss would run into crores if a thorough enquiry is done)". His report accuses the operators of several mines of "very serious violations of various mining conditions/Forest Conservation Act/ Karnataka Forest Act/ Environmental Protection Act/ Mines and Minerals Acts, etc".
According to Mathew Guru, the owner of a large transport business in Bellary, the mining boom has benefited not just mining lease-holders but the district as a whole as it has given jobs to lakhs of people.
"On an average the cost of mining is between Rs.200 and Rs.250 a tonne. The price of C-ore and fines (iron ore dust) is Rs.1,400 a tonne at the mines and Rs.2,700 if transported to the harbour. Most mine owners in Bellary are worth more than Rs.1,000 crores," he said.
RED DUST
Roughly 7,500 lorries move out of Bellary daily carrying ore and fines (ore dust) to the ports in the east and the west. The dust these lorries generate settles on everything.
At the Government Model Higher Primary School in Taranagar, Sandur taluk, respiratory disorders among children in the last five years have increased substantially because of the dust that is thrown up by the lorries that ply up and down the road in front of the school, according to Sundaresh Kumar, the physical instruction teacher in the school.
"At least 2,000 lorries pass in front of the school every day," he said. "By the evening the children are covered in red dust."
Even as the mine owners turn from millionaires to billionaires, the mine workers - thousands of migrant agricultural workers among them - labour under the most appalling conditions. In the smaller and most often illegal "float-ore" mines, working families dig shallow pits to bring up lumps of iron ore that is then broken down by hand. At larger mines, they operate heavy machinery such as excavators and dumpers.
They drive the endless convoys of ore-laden lorries from work sites to ports in Mangalore, Karwar, Vishakhapatnam and Chennai. They work for over 12 hours a day in the lung-choking environment created by swirling ore-laden clouds of red dust that permeate even the small hovels that entire families crowd into to sleep. Their living quarters have no water, electricity or sanitation.
"There was no work for us in our village in Kushtagi [Raichur taluk]: here we get Rs.5 for every putti [iron basin] of ore we break down," said Sharadamma, an emaciated young mother of three, as she and her friends Padma and Shara pick up dry twigs from the roadside near Subburayanahalli village in Sandur, a region whose forested hillsides and fertile valleys are being fast denuded by uncontrolled private mining. She can break roughly 10 puttis on a good day of work. "The rate used to be Rs.8 for a putti, but now that so many people want work, the price has been pushed down. We are our own enemies."
The biggest wrongdoing committed by mining companies, with the exception of state-owned companies, is the gross exploitation of labour, including children, the class that creates their wealth. This is an issue that does not find a mention in the terms of reference of the Bhatt Commission of Inquiry, nor in any of the official reports on the mining sector. A report that investigates mining illegalities but which does not investigate the violations of labour rights will, indeed, be a partial one.
Sunday, November 9, 2008
Liquidity Problems of Mining Investments
On Aug. 22, 2008, Fitch Ratings published a special report entitled “Corporate
Liquidity: Bank Agreements and Refinancing Risk,” which discusses Fitch’s view of the
current credit market environment. The report emphasizes that Fitch’s ratings and
analysis of corporate liquidity are weighted more heavily on internal sources of funds:
cash holdings and cash generated from operations.
Since that time, the credit market tightened significantly raising the specter of a
consumer recession. Metal prices have fallen sharply and production and capital
expenditure cutbacks are being considered or announced. Demand from China and
other developing nations has driven strong growth in consumption and indications are
that growth will slow for at least the next 12 months. The HSBC North America Mining
Index, a capitalization weighted index, has halved since Aug. 22, 2008.
Steel, aluminum and copper prices are expected to trough in 2009. Coal prices and gold
prices are expected to hold up reasonably well over the next 12−18 months. Costs
should benefit from the decline in energy prices as well as production efficiencies.
While Fitch performs comprehensive ongoing liquidity surveillance as a function of our
core rating process, this report provides a more in-depth analysis of mining and metal
sector liquidity.
Key Conclusions
• Liquidity for the mining and metals sector is generally healthy. Most companies
have taken advantage of strong prices to improve their assets and capital structure.
• Free cash flow is highly influenced by capital spending programs, which can take
more than one year to complete. Curtailments in exploration and development to
conserve cash will result in short supply beginning in 2011 for copper, nickel and
zinc.
• Steam coal producers generally sell coal under long-term contracts where prices are
known for a period of three years. While volumes could be off from a very strong
2008, earnings should benefit from strong pricing momentum. Metallurgical coal
producers generally sell under annual contracts. Prices should benefit from fairly
tight markets over the next 12−18 months.
• Copper price swings are generally influenced by speculative demand and the recent
precipitous fall was accentuated by financial buyers unwinding positions.
• While some earnings are expected to decline in 2009 from robust 2008 levels, runoff
of working capital and active management of capital budgets should partially offset
the impact to free cash flow. Financial covenant levels should not constrain
borrowing under the revolving credit facilities over the next 12−18 months.
• On Sept. 30, 2008, Teck Cominco Ltd. signed definitive credit agreements totaling
$9.81 billion, which it plans to use for funding the cash portion of its takeover of
Fording Canadian Coal Trust. The agreements include a fully underwritten $4 billion
senior term loan and a $5.81 billion senior bridge loan.
Liquidity: Bank Agreements and Refinancing Risk,” which discusses Fitch’s view of the
current credit market environment. The report emphasizes that Fitch’s ratings and
analysis of corporate liquidity are weighted more heavily on internal sources of funds:
cash holdings and cash generated from operations.
Since that time, the credit market tightened significantly raising the specter of a
consumer recession. Metal prices have fallen sharply and production and capital
expenditure cutbacks are being considered or announced. Demand from China and
other developing nations has driven strong growth in consumption and indications are
that growth will slow for at least the next 12 months. The HSBC North America Mining
Index, a capitalization weighted index, has halved since Aug. 22, 2008.
Steel, aluminum and copper prices are expected to trough in 2009. Coal prices and gold
prices are expected to hold up reasonably well over the next 12−18 months. Costs
should benefit from the decline in energy prices as well as production efficiencies.
While Fitch performs comprehensive ongoing liquidity surveillance as a function of our
core rating process, this report provides a more in-depth analysis of mining and metal
sector liquidity.
Key Conclusions
• Liquidity for the mining and metals sector is generally healthy. Most companies
have taken advantage of strong prices to improve their assets and capital structure.
• Free cash flow is highly influenced by capital spending programs, which can take
more than one year to complete. Curtailments in exploration and development to
conserve cash will result in short supply beginning in 2011 for copper, nickel and
zinc.
• Steam coal producers generally sell coal under long-term contracts where prices are
known for a period of three years. While volumes could be off from a very strong
2008, earnings should benefit from strong pricing momentum. Metallurgical coal
producers generally sell under annual contracts. Prices should benefit from fairly
tight markets over the next 12−18 months.
• Copper price swings are generally influenced by speculative demand and the recent
precipitous fall was accentuated by financial buyers unwinding positions.
• While some earnings are expected to decline in 2009 from robust 2008 levels, runoff
of working capital and active management of capital budgets should partially offset
the impact to free cash flow. Financial covenant levels should not constrain
borrowing under the revolving credit facilities over the next 12−18 months.
• On Sept. 30, 2008, Teck Cominco Ltd. signed definitive credit agreements totaling
$9.81 billion, which it plans to use for funding the cash portion of its takeover of
Fording Canadian Coal Trust. The agreements include a fully underwritten $4 billion
senior term loan and a $5.81 billion senior bridge loan.
Thursday, November 6, 2008
Think Strategy and Quick Response
What goes up must come down. After a record-breaking 10-year boom for commodities, it was inevitable that prices would have to retreat—especially in the face of global financial turmoil and sagging economic growth. And retreat they have: The prices of some metals are down by more than 50% since the start of 2008, dragging with them shares in mining giants such as BHP Billiton (BBL) and Rio Tinto (RTP).
Is it the end of the party for natural resources? "We're definitely seeing a slowdown in the mining sector," says Iain Armstrong, divisional director at investment firm Brewin Dolphin in London. "Company [share] prices will remain weak, as we're past the best of the current commodity cycle."
But the downturn may be only temporary. Although 2009 is shaping up to be a tough year on the back of the current slowdown, demand from emerging economies should pick up again in 2010, potentially fueling another commodities boom. "Strong fundamentals underpin high commodity prices in the long run," says Jason Burkitt, a director in the mining practice at consultancy PriceWaterhouseCoopers (PWC).
Capital Spending Slowdown
That view is echoed by Tom Albanese, chief executive of Anglo-Australian mining company Rio Tinto, who briefed analysts Oct. 15 on the company's third-quarter results. "The Chinese economy is pausing for a breath," Albanese said. Although the company's iron ore production in the quarter rose 17% year-over-year, he conceded that future capital spending is now under review and production growth would be reduced "to fit current trends." Albanese remains confident of Rio Tinto's long-term growth prospects.
Analysts expect other companies, including Xstrata (XTA.L) and Anglo American (AAUK), to make similar statements about investment freezes when they announce third-quarter updates before the end of October. Aluminum giant Alcoa (AA) already said it would halt all noncritical capital expenditures when it announced on Oct. 7 a 52% yearly drop in third-quarter net profits, to $268 million.
It's unquestionably a new and different world than just a few months ago. For a decade, mining companies have ridden a wave of ever-expanding demand for natural resources from emerging economies, especially China and India. As prices for commodities—everything from oil and iron ore to precious metals such as platinum and silver—skyrocketed, so did profits and share prices. The SPDR S&P Metals & Mining stock index surged nearly 92% from the start of 2007 until its peak on June 27 of this year.
Now the economic turmoil is starting to bite, even in sizzling emerging economies. Analysts at UBS (UBS) expect gross domestic product growth in China—the world's largest iron ore consumer—to fall to 8% next year, compared with 12% in 2007. And Morgan Stanley (MS) recently cut its forecast for overall emerging-market GDP growth in 2009 from 6.2% to 5.5%. The slower-growing economies will need less metal to meet dwindling export demand and slackening local markets.
Rethinking Strategy
The impact is already being felt by BHP Billiton, Rio Tinto, and Brazil's Vale (RIO), which dominate global iron ore production and are the world's largest mining companies by market capitalization. After negotiating almost 100% price increases with their Chinese customers earlier this year, all three now are likely to see a 30% decline in iron ore prices in 2009 as demand declines, particularly from the troubled automotive sector. Steelmakers, including giant ArcelorMittal (MT), already have announced production cuts for 2009. Tighter credit also is making it tougher for mining companies, especially smaller ones, to finance new projects.
Analysts say mining companies will have to rethink their strategies based on the new pricing environment. "Most of the miners will have to look seriously at which metals they focus on in future investment," says Charles Cooper, an analyst at stockbroker Evolution Securities in London. "High-cost production, such as nickel and zinc, may have to be cut." Nickel and zinc prices have fallen 54% and 42%, respectively, so far this year.
The uncertainty also is wreaking havoc on merger and acquisition activity. Xstrata recently abandoned an attempt to buy platinum producer Lonmin (LMI.L), in part because of falling prices for the metal. The biggest question remains BHP Billiton's ongoing all-share takeover bid for Rio Tinto (BusinessWeek.com, 8/26/08), which may have to be renegotiated. Thanks to its falling share price, BHP's offer for Rio is now worth only $84 billion, vs. $147 billion early this year. Analysts say that smaller deals now stand a better chance of going through, as companies with deeper capital reserves snap up players who are finding it difficult to fund their operations in the current environment.
Production Cut Pitfalls
Companies must be careful not to cut production too much because it would undermine their long-term prospects. Unlike tapping oil and gas fields, extracting metals from the ground can't be easily stopped and restarted. That means any cutbacks over the next 12 months could slow commodity output over the next five years.
"Mining companies know they have to invest now to meet future demand," says Chris Thomas, a director on the metals and mining team at consultancy Deloitte. Most of the companies went through the commodity downturn in the late 1990s, which prompted a big cutback in capital investments. Many of them are still catching up from that freeze and don't want to suffer the same backlog this time around, Thomas adds.
That means mining companies must walk a difficult line between offsetting short-term falls in commodity prices and planning for improved metals demand from 2010 onwards. Those willing and able to invest during the slump could reap major rewards when the likes of China and India ramp back up again, says PWC's Burkitt. Companies that don't may see times even more difficult than today.
Is it the end of the party for natural resources? "We're definitely seeing a slowdown in the mining sector," says Iain Armstrong, divisional director at investment firm Brewin Dolphin in London. "Company [share] prices will remain weak, as we're past the best of the current commodity cycle."
But the downturn may be only temporary. Although 2009 is shaping up to be a tough year on the back of the current slowdown, demand from emerging economies should pick up again in 2010, potentially fueling another commodities boom. "Strong fundamentals underpin high commodity prices in the long run," says Jason Burkitt, a director in the mining practice at consultancy PriceWaterhouseCoopers (PWC).
Capital Spending Slowdown
That view is echoed by Tom Albanese, chief executive of Anglo-Australian mining company Rio Tinto, who briefed analysts Oct. 15 on the company's third-quarter results. "The Chinese economy is pausing for a breath," Albanese said. Although the company's iron ore production in the quarter rose 17% year-over-year, he conceded that future capital spending is now under review and production growth would be reduced "to fit current trends." Albanese remains confident of Rio Tinto's long-term growth prospects.
Analysts expect other companies, including Xstrata (XTA.L) and Anglo American (AAUK), to make similar statements about investment freezes when they announce third-quarter updates before the end of October. Aluminum giant Alcoa (AA) already said it would halt all noncritical capital expenditures when it announced on Oct. 7 a 52% yearly drop in third-quarter net profits, to $268 million.
It's unquestionably a new and different world than just a few months ago. For a decade, mining companies have ridden a wave of ever-expanding demand for natural resources from emerging economies, especially China and India. As prices for commodities—everything from oil and iron ore to precious metals such as platinum and silver—skyrocketed, so did profits and share prices. The SPDR S&P Metals & Mining stock index surged nearly 92% from the start of 2007 until its peak on June 27 of this year.
Now the economic turmoil is starting to bite, even in sizzling emerging economies. Analysts at UBS (UBS) expect gross domestic product growth in China—the world's largest iron ore consumer—to fall to 8% next year, compared with 12% in 2007. And Morgan Stanley (MS) recently cut its forecast for overall emerging-market GDP growth in 2009 from 6.2% to 5.5%. The slower-growing economies will need less metal to meet dwindling export demand and slackening local markets.
Rethinking Strategy
The impact is already being felt by BHP Billiton, Rio Tinto, and Brazil's Vale (RIO), which dominate global iron ore production and are the world's largest mining companies by market capitalization. After negotiating almost 100% price increases with their Chinese customers earlier this year, all three now are likely to see a 30% decline in iron ore prices in 2009 as demand declines, particularly from the troubled automotive sector. Steelmakers, including giant ArcelorMittal (MT), already have announced production cuts for 2009. Tighter credit also is making it tougher for mining companies, especially smaller ones, to finance new projects.
Analysts say mining companies will have to rethink their strategies based on the new pricing environment. "Most of the miners will have to look seriously at which metals they focus on in future investment," says Charles Cooper, an analyst at stockbroker Evolution Securities in London. "High-cost production, such as nickel and zinc, may have to be cut." Nickel and zinc prices have fallen 54% and 42%, respectively, so far this year.
The uncertainty also is wreaking havoc on merger and acquisition activity. Xstrata recently abandoned an attempt to buy platinum producer Lonmin (LMI.L), in part because of falling prices for the metal. The biggest question remains BHP Billiton's ongoing all-share takeover bid for Rio Tinto (BusinessWeek.com, 8/26/08), which may have to be renegotiated. Thanks to its falling share price, BHP's offer for Rio is now worth only $84 billion, vs. $147 billion early this year. Analysts say that smaller deals now stand a better chance of going through, as companies with deeper capital reserves snap up players who are finding it difficult to fund their operations in the current environment.
Production Cut Pitfalls
Companies must be careful not to cut production too much because it would undermine their long-term prospects. Unlike tapping oil and gas fields, extracting metals from the ground can't be easily stopped and restarted. That means any cutbacks over the next 12 months could slow commodity output over the next five years.
"Mining companies know they have to invest now to meet future demand," says Chris Thomas, a director on the metals and mining team at consultancy Deloitte. Most of the companies went through the commodity downturn in the late 1990s, which prompted a big cutback in capital investments. Many of them are still catching up from that freeze and don't want to suffer the same backlog this time around, Thomas adds.
That means mining companies must walk a difficult line between offsetting short-term falls in commodity prices and planning for improved metals demand from 2010 onwards. Those willing and able to invest during the slump could reap major rewards when the likes of China and India ramp back up again, says PWC's Burkitt. Companies that don't may see times even more difficult than today.
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