Article on commodities boom potentialCAPEX DECIMATED
Rio's cuts indicative of trend which must lead to major commodities price boom
Withmajor miners cutting back capex commitments sharply and others unableto proceed with current projects in the pipeline, logic suggests we maybe in for another commodities boom sooner rather than later.
Author: Lawrence Williams
Posted:Wednesday,10 Dec 2008
LONDON -
The latest cuts announced today by major mining company, Rio Tintofollow on announcements of huge cutbacks in capital spending by allthe other major mining companies amounting to tens of billions ofdollars in total. Together with the inability of many mid-sized andjunior miners to implement proposed new mining projects because of theglobal financial situation and low equity prices, and announced mineclosures because of low commodity prices, we are heading for anenormous shortfall of new mine output in the years ahead.
Take today's announced cuts by Rio into for example. The company isplanning to cut its proposed capital expenditures for next year aloneby some $5 BILLION. That is more than half of its scheduled $9 billiondollars of capex for the year. Anglo American has just announcecutbacks of billions of dollars in 2009 capex as well, while the othermajors - BHP Billiton, Vale, Freeport McMoran etc. have all reportedhuge capital and capacity cutbacks in the year ahead.
Indeed capacity cutbacks alone from the major mining companies willdramatically change the supply situation in 2009 on their own. Thecapital spending cutbacks will mean that the fall in planned outputwill linger on for several more years. In particular nickel, zinc andcopper operations seem to be the main areas of cutbacks, although it isinteresting to note that the Chinese seem particularly keen to investin, and tie down, long term supplies in zinc in particular which hasperhaps suffered most of all in the commodities price collapse. Thiscould suggest that these companies see the short to medium termprospects for the Chinese steel sector (the major consumer of zinc) asperhaps being rather better than is being assessed by western analysts.
While global commodities demand projections for 2009 areconsiderably lower than they were only six months ago, most predictionsoverall for global growth don't see an overall reduction, but just farslower growth than we have seen in current years. This suggests alsothat global demand for metals and minerals in 2009 may actually be muchthe same as in 2008. Not rising, but not necessarily falling either.It is only falling from the originally predicted levels which includedbig growth projections still from China.
So, assuming global demand is in reality flat rather thansignificantly down, but production is falling dramatically for somemetals and minerals, as soon as industry stabilises a little - whichcould be as soon as the end of the first quarter of 2009 - we will beheading for potentially substantial supply shortfalls. In normalcircumstances this will lead to prices being bid up again sooner ratherthan later. Prices are probably being over-depressed by perception atthe moment rather than by reality.
Of course if the global downturn is more severe and longer lingeringthan is generally predicted and metals demand actually falls further,then the above prediction will go by the board. But gut feelingsuggests that things may be beginning to pick up after the Chinese NewYear (late January) with things continuing to drift until then.Economic stimuli in both the West and the East should start having aneffect first half of 2009. The collapse in commodity prices may wellbe much more shortlived than the general economic pundits may besuggesting and prices could start picking up sharply during 2009 - andas the current capital cutbacks continue to impact on supplies in theyears ahead the 2005-2008 commodities boom could be repeated, or evenexceeded, in 2009-2011 and beyond..