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Ardent Listener
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 Posted - 12/16/2010 : 18:52:17
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Markets
Record copper rally bumps up capital costs
By Javier Blas, Financial Times
Published: 00:00 December 17, 2010
Record run bumps up capital costs
The price of copper at an all-time high? The cost of iron ore and thermal coal both at two-year highs as China buys more? Buying an excavator for the mine? Priceless.
As commodities prices surge on the back of booming demand from emerging countries, global miners have launched a round of capital expenditures for 2011 that will surpass the record set in 2008 as executives fear will create bottlenecks and drive the cost of equipment such as excavators, trucks or explosives higher.
Don't get me wrong: it is not nearly as bad as 2007-08, when the industry was ravaged by cost inflation and long lead times, but mining executives have started to raise the issue in the past few weeks, suggesting a looming concern.
The potential for cost inflation and lead times is important on three fronts:
Another windfall
First, it will support higher commodities prices as projects will suffer delays. Second, it will spread another windfall over the mining services industry — the share price of companies such as Joy Global, the US manufacturer of excavators, is near the 2008 peak, and others are already above.
Third, it will reduce the amount of cash free to return to investors, just as they are demanding higher payouts.
In conversations over the last few weeks, executives say that "security of supply" has replaced price as their top consideration when ordering new equipment.
The executives I talked to recently were somewhat cautious about the outlook. Some believe the industry has learned the lessons of 2007-08 and will avoid delays, although pay higher prices.
Others are far more pessimistic, noting that there are too many projects at the same time in relatively few locations, stretching the capacity of the services industry to deliver. Those trends, they say, will only worsen next year.
Rising demand
Take Australia, a big producer of anything from iron ore to gold, as an example.
Only there, global miners will ramp up their investment in current and new projects by a massive 58 per cent in 2011 as almost every big company announces plans to boost production to cash in on rising demand from China and elsewhere.
"The relatively high number of new projects reflects an increase in prices over the past 18 months, with an improved outlook for minerals, and increased investment in exploration expenditure in recent years," the Australian Bureau of Agricultural and Resource Economics (Abare) said in a report on Tuesday.
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Record copper rally bumps up capital costs
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