Mining's new age of austerity will hurt consumers
The Financial Times today draws an interesting analogy between the changing dynamics in the oil world in the 1990s and the transformation currently under way in the global mining industry.
The new age of austerity in the metals and mineral sector was more or less made official by the world's number one diversified miner BHP Billiton mid-year, when CEO Marius Kloppers announced a cull of some $80 billion in capital spending.
The Anglo-Australian giant has since put off for several years mega-projects like the uranium-copper-gold Olympic Dam expansion and its Outer Harbour iron ore infrastructure expansion plans (although it seems to still favour a new $8 billion potash mine in Canada.)
Others have followed suit including Brazilian iron ore behemoth Vale scaling back investments in West Africa and many gold producers – like Canada's Barrick with its Pascua-Lama project straddingling Chile-Argentina – have slowed down investment and are putting new emphasis on cost controls.
Perhaps the best indication of the end favourable viewing by boards of companies undertaking large greenfield projects is the departure of Cynthia Carroll.
While problems at Anglo-American were many including labour in South Africa and legal difficulties in Chile, what appears to be main reason Carroll was forced out was the massive Minas Rio iron ore project in Brazil which suffered from serious cost inflation and long delays.
The Financial Times says the new emphasis on shareholder returns vs revenue growth will turn out to hurt consumers of metals and minerals:
Big Oil also embraced return on capital employed, or ROCE, as its main – and often sole – metric during the 1990s as crude oil prices fell well below $20 a barrel to a 30-year low of roughly $8 a barrel in 1998. The pressure from Wall Street to deliver returns resulted in a sharp contraction in capital expenditure, which led to a multitude of project cancellations.
Over time, less spending translated into lower production growth. Oil supply growth outside the Opec cartel slowed down from roughly 800,000 barrels a day in the early 1990s to less than 300,000 b/d by the end of the decade. Shareholders celebrated as lower supply boosted prices and profits; consumers, from drivers at the pump to fuel-intensive companies such as FedEx, felt the pain.
The mining industry is now taking the same route as the oil industry nearly two decades ago – and the results will be similar.
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Image is of a September 2012 rally in Toronto against Canada's federal government spending cuts. – ValeStock / Shutterstock.com.