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16. June 2008

Canada - Miners struggle to keep the pace

Saguenay, Quebec -- The world's major mining companies are operating with little slack in their production systems, making them vulnerable to interruptions and their customers subject to price spikes.

Several events in recent days, including a strike in Peru and a gas explosion in Australia, have exposed the downside of a sector operating at full capacity.

"We are in a period of extreme scarcity, which is uncomfortable," says Marius Kloppers, chief executive officer of BHP Billiton Ltd., the world's largest miner. "Prices have risen basically because supply and demand is so tight."

This week, a strike in Peru is the latest threat to constrain the supply of copper, which already has been at record-high prices this year. Unions in Peru are threatening a nationwide mining strike at month's end.

In Australia, Billiton shut a nickel smelter and refinery for repairs, cutting global supply by 2% and driving prices to a three-week high. Also, the gas explosion prompted Alcoa Inc. to invoke a contract clause allowing it to cut alumina deliveries, and it warned that its earnings would be clipped by two cents to three cents in the quarter.

Power problems in Argentina and South Africa have forced miners to reduce production or put off much-needed expansion.

"This is an example of the tight-supply challenge; everything stays tight means everything is more vulnerable," says Tom Albanese, CEO of Rio Tinto PLC, the world's third-largest miner. "We should expect short-term supply shocks, because these supply chains are driven by a range of complex issues."

He predicts supplies of some raw materials, including iron ore, copper and aluminum, will remain tight or get even tighter over the next four years, at least. That will create tightness in supplies of metal-based equipment, machinery and manpower as miners compete for limited resources.

Already, miners are battling longer-than-ever lead times to get equipment. Take iron castings: Miners use them to make the huge dumpers on trains that carry ore. It used to take about 1.5 years to get these castings; now, it takes about 3.5 years from order to delivery, Mr. Albanese says. That will affect Rio's expansion plans for iron-ore production in the Australian Pilbara region.

BHP says it is having trouble obtaining enough explosives, which are used to loosen the earth, making digging out iron ore easier. Not only are explosives harder to find, their prices have risen about 35% in the past two years. BHP says it expects the price of explosives to continue to climb.

Likewise, Russia's UC Rusal, the world's biggest aluminum maker, says its operations are slowed by the longer times to get supplies, such as chemicals. "It can take twice as long as before," says Artem Volynets, director of corporate strategy.

As long as there is more demand than supply, miners will be able to largely pass on their costs to customers. That is likely to affect steel makers, automobile manufacturers, governments and everyday people buying jewelry.

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