Crazy metal prices inflate miners’ capex conundrum

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Soaring commodity prices should be a green light for global miners.

At $10,000 and $200 a tonne, copper and iron ore are both way above the levels at which it makes commercial sense for BHP, Rio Tinto, and others to start digging new holes. Yet the sector’s investment plans remain stubbornly short of what’s needed to decarbonise the global economy.

Restricting global warming to less than 2 degrees Celsius above pre-industrial levels is going to take an epic increase in the supply of metals used in electric vehicle batteries, electricity grids and wind turbines.

According to analyst Wood Mackenzie, for copper alone miners need to add an extra 23 million tonnes of capacity, around double current levels. It reckons the investment required works out at $22,900 a tonne, or $526 billion.

Throw in nickel, aluminium, cobalt and lithium, and the gap between miners’ current spending plans and what the energy transition requires over the next 15 years is almost $2 trillion.

BHP boss Mike Henry and Rio Chief Executive Jakob Stausholm could invest more.

JPMorgan estimates that European miners’ earnings this year will comfortably exceed even 2011’s inflated levels.

BHP has minimal net debt and Rio is sitting on net cash. And the amount of fresh supply required means prices could stay high even when new mines open.

Yet there’s a more basic reason for both shareholders and executives to embrace the green transition. Most of BHP and Rio’s EBITDA comes from iron ore, the base ingredient of steel.

While this has a longer-term role to play, moves to decarbonise steel production may mean lower demand.

Current high prices are more about the short-term recovery from the pandemic, which, as a 10% drop in iron ore prices on Thursday implied, may stall if central banks and governments start freaking out about inflation.

Viewed like that, diversifying into greener metals doesn’t look like such a risk.

(By George Hay; Editing by Ed Cropley and Oliver Taslic)


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