In the late 1980s, Japan.s strong economy triggered a
short boom period for the mining industry, suddenly interrupted
by the collapse of the
flooding of Russian metals onto the world markets. Before and
after this period, underinvestment in mines and machinery,
reduced exploration and a limited number of major discoveries
were symptoms of a sector declining for some 20 years. Since
then, suppliers have become much more disciplined. M&A
activities have been driven by targeted economies of scale, the
supply of concentrate and metals is under better control now,
and metals are stockpiled outside the market to avoid
oversupply. Company executives have learned to focus on
returns rather than volume growth.
cash flow generation, which was mainly utilized for share buy-
backs, extra dividends and debt reduction, rather than
increasing production capacity. However, the rush for metals
related to the Chinese boom has dramatically increased
demand and turned
importer of most metals. The need for metals has become so
strong that it has driven prices to historical highs, and the
likelihood of decelerating demand still looks years away. Most
companies have started new projects and activated plans to
increase permanently their capacity, especially in the aluminum
and steel industry. But the future trend still remains very
positive in many segments: namely, copper, zinc, nickel, PGM
and, to the extent permitted by international regulations,
uranium.
elated to suppliers. behavior. On the one hand, metals a
mining companies have substantially rigid cost structure
given the capital intensity of their operations and the presen
of high exit barriers. During downturns, the necessity to cov
elevant fixed costs to keep volumes high may hind
operational downsizing or shutdowns, exacerbating t
problem of overcapacity and, ultimately, accelerating pri
erosion. On the other hand, given a very long project pipeli
the process from feasibility study to fully operational mini
site can take over seven years, five being the average le
ime), metals and mining executives often decide to increa
capacity when prices are just high enough, i.e. close to peak
Nevertheless, by the time an expansion project is operation
he cycle is likely to be in a downturn, creating addition
overcapacity in a market already plagued by weak demand.
As an example, aluminum smelters, highly energy-intensive
plants, are usually located in areas where power is provided at
the lowest cost possible, which is mainly where hydropower can
be generated. Steel is manufactured using two primary methods:
.blast furnaces. and, to a lesser extent, .electric-arc furnaces.
(also called EAF or mini-mills), the former employing massive
quantities of coking coal and electricity or gas, the latter being
mostly electricity driven, and mainly used in
Since both aluminum and steel are produced through a
continuous process, which requires uninterrupted power
supply, manufacturers dread the risk of power shortages.
Since most utility executives expect blackouts to become more
frequent in the future, industry players are also concerned
about having stable power for their operations. However,
because of environmental worries and the high cost of oil, the
more expensive nuclear power plants are likely to account for a
greater share of new power plants in the coming years, with
renewable energy sources accounting for a stable, but
irrelevant, share. According to PWC.s .Utilities global survey
2005,. steaming coal plants, although they are considered to
be among the cheapest energy generators, will experience a
major shift, with 5% of their current total production being
switched to natural gas.
rising cost of energy in developed regions . shifting many
operations toward countries with low-cost electricity . continuity
in power generation and transmission will become an increasingly
important issue also for emerging markets. As a matter of fact,
power shortages in such areas can be a major obstacle to the
development of a larger-scale aluminum industry through
production capacity increases. At present, approximately 4% of
total power generated in
and any additional smelting capacity is sustainable as long as
additional energy is provided at competitive cost. The Chinese
government is addressing the increasing demand for power with
an extensive power-generation program, also aimed at reducing
the country.s reliance on oil supplies. Hence, although
should keep pace with higher electricity consumption, the cost
for power might increase in the next few years beyond the
threshold of economic convenience for energy-intensive
operations. Other interesting countries are
hydropower facilities, and
both providing energy at a reasonably low cost.
It is worth noting that power generation and costs are not
always as relevant as distribution issues. An increasing number
of mining sites are located in remote areas of the globe where
no power is available: for instance, Canada.s prime sites for
diamond extraction are located in the
thousands of kilometers from the nearest inhabited area. As a
consequence of progressive depletion of easier access mining
sites, the difficulties challenging future developments will be
increasingly related to location issues.
rising cost of energy in developed regions . shifting
operations toward countries with low-cost electricity . co
in power generation and transmission will become an incre
important issue also for emerging markets. As a matter
power shortages in such areas can be a major obstacle
development of a larger-scale aluminum industry t
production capacity increases. At present, approximately
total power generated in
and any additional smelting capacity is sustainable as l
additional energy is provided at competitive cost. The C
government is addressing the increasing demand for pow
an extensive power-generation program, also aimed at re
the country.s reliance on oil supplies. Hence, although
should keep pace with higher electricity consumption, th
for power might increase in the next few years beyo
threshold of economic convenience for energy-in
operations. Other interesting countries are
hydropower facilities, and
both providing energy at a reasonably low cost.
ubstantial: in FY 2005, BHP Billiton reported total restoration
nd rehabilitation provisions of USD 3.59 billion and set aside
ome USD 331 million in new provisions on its profit and loss
atement, which represented 1.1% of its total operating
venues of USD 29.65 billion. Alcoa Inc. reported total
ovisions of USD 258 million for environmental remediation in
Y 2005 compared to USD 26.16 billion in sales, with costs
harged to the profit and loss statement amounting to USD 31
illion, or 1.3% of total revenues. In FY 2004, Anglo
market upturn, dominating materials for more than six years.
Its average 9.3% GDP growth p.a. since 1990 has pushed up
the CAGR of most metals. However,
supplier, being a strong producer of alumina, iron ore, steel,
zinc and related by-products. Chinese domestic production has
grown enormously in just a few years, but the country has
nevertheless shifted from net exporter to net importer in many
segments.
exporter for that metal. It started massive exportation of steel
in 2004 as a result of increased capacity added in response to
rising internal demand, creating the side-effect of higher
demand for raw materials such as iron ore. The country also
fueled demand for concentrates such as copper, necessary for
the telecoms industry and for the power cabling of new urban
areas. Although the forecast for the trend in demand is
positive for the coming years, there are a few aspects that
may cool down growth. The strong power intensity of the
aluminum industry, for instance, requires that any further
capacity expansion addresses the problem of the already
stretched energy supplies. Since we do not expect Chinese
utilities to generate and distribute additional power at current
tariffs, soaring power consumption should eventually prompt
aluminum makers to deal with higher marginal costs.
Nonetheless, as long as Chinese producers are capable of
gaining a marginal profit on the extra production, we expect
them to keep pace with announced capacity enlargements.
The risk is that, within a few years, the market could be
flooded with Chinese aluminum, exactly as it would be with
low-cost Chinese steel if there weren.t any trade restrictions.
The pace of China.s growth is far from losing strength, at least
in the near term, but in the coming years
assume a major role in the world.s economy.
potentially as challenging as
supply, does not benefit from infrastructures that are as
developed as China.s, thus the country needs major
enhancements to support its growing economy.
represents the world.s biggest gold consumer, and the recent
cut in the import tax on metals will stimulate further external
demand. Furthermore, and in contrast to
population represents an additional factor that will add more
and more pressure to domestic demand.
Other emerging markets, such as
sizable portion of their demand for materials coming from the
urbanization process. However,
the levels of developed countries (with 70%-80% of the
population living in cities), but that does not apply to the
remainder.
its population lives in economically underdeveloped areas, and
we thus expect higher rates in materials consumption coming
from
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between fixed and variable costs and being conscious of the
intrinsic difficulty of temporarily downsizing the operations .
have chosen to mothball some of the less profitable plants,
operating only those generating higher margins and funding
efficiency-enhancement projects with the proceeds from
divestitures. The main sector-related costs are a) mining (e.g.
rock breaking, loading and transportation), b) mineral
processing (crushing and grinding, concentration, and
refining), c) smelting and d) final product processing.
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