Fuel, wages, chemicals grow more expensive, posing risk to gains
made in turnaround
By Rhiannon Hoyle
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (March 13, 2018).
The world's biggest mining companies, flush with profits from a
recent commodity-market rebound, are grappling with a new
challenge: how to keep rising costs from eating into those
hard-earned gains.
For much of this decade, mining companies have prioritized
reducing how much they spend to dig up each ton of the commodities
they sell, after a market slump made it harder to turn a profit.
Companies including BHP Billiton Ltd., Rio Tinto Ltd. and Glencore
PLC introduced drones and driverless trucks, cut tens of thousands
of jobs and sought advice from other industries, including the
automobile business, to make their pits more efficient.
Now the sector faces a fresh cost crunch as prices for things
including fuel, wages and chemicals begin to climb. Energy bills
are rising after an oil rally of more than 20% this past year. Raw
materials including coke, which helps to fuel iron-ore smelters,
and caustic soda, used to extract alumina from bauxite, are also
rocketing higher in price. Workers are demanding higher wages in
many countries, including the copper-mining hub of Chile, where
truck drivers say better metal prices should translate to fatter
pay packets.
A depreciating U.S. dollar versus the currencies of top mining
countries is also putting pressure on margins, as commodities are
mostly sold using the U.S. currency. The South African rand is up
22% over the past four months.
"Clearly, inflation's becoming a bigger issue," said Anglo
American PLC Chief Executive Mark Cutifani. "So we've got to run
twice as hard." Costs are increasing for reasons similar to those
driving the commodity-market turnaround: a healthier global economy
and rising demand.
Mining companies stripped billions of dollars in costs from
their operations as they sought to get a handle on budgets that
spiraled during the latest commodities boom.
Between 2012 and 2016, copper producers globally slashed their
output costs -- the cost to produce 1 pound of metal -- by roughly
one-quarter, according to data from S&P Global Market
Intelligence. Still, that followed a more-than-tripling of costs in
the decade prior to 2012. S&P projects copper-output costs rose
in 2017 for the first time in five years.
Right now, higher commodity prices are certainly more than
offsetting higher expenses. Commodity prices have climbed roughly
20% since mid-2017, according to the S&P GSCI commodities
index, underpinned by a rare period of synchronized economic growth
in China, the U.S., Europe and major economies elsewhere.
Mining companies are making significant profits once again. Rio
Tinto, the world's No. 2 miner by market value, and rival Anglo
American both last month reported a doubling of annual net profit.
Glencore said it quadrupled its earnings in 2017.
With fuel and other necessary raw materials getting more
expensive, there will be pressure to find fresh cuts elsewhere to
protect margins, executives said. A further rise in mining costs
could provide a further boost to the commodity-market rally,
analysts said, particularly if investors bet on it causing some
smaller companies to pare production.
"The one thing that comes with inflation is a better commodity
price," said Anglo's Mr. Cutifani. But, he said, "we don't want to
rely on rising prices." Mr. Cutifani said Anglo will race inflation
to cut the costs it can, targeting an extra US$3 billion to US$4
billion in savings by 2022 through improvements to expenses,
productivity and sales.
The return of inflationary pressures already sparked earnings
misses for several mining titans during the latest
corporate-earnings season, damping their stock-market rally.
"Further cost inflation in the mining industry is inevitable, in
our view, unless global economic activity slows," said Jefferies
analyst Christopher LaFemina, who said BHP and Rio, among others,
fell short of his earnings forecasts because of unexpectedly high
costs.
Anglo American felt the sharpest sting in its South African coal
division, where costs for its export operations jumped 29%.
Rio Tinto forecast cost headwinds of US$300 million in 2018,
which would erase half its projected productivity improvements for
this year. "We will continue to be tough on costs," pledged Rio
Chief Financial Officer Chris Lynch.
Glencore CFO Steve Kalmin said the company was experiencing
rising prices in diesel, steel and explosives, among other things.
There is also increasing competition for workers, although it's
"nowhere near where things were back in the 2007-08" period when
there was a scramble for basic skills, he said.
BHP cautioned of pockets of inflation in its petroleum and
minerals businesses, although CEO Andrew Mackenzie played down
concerns that renewed pressures would dent the miner's bottom
line.
"We, as a company, feel confident that we are able to quench
that and continue to drive our cost down," he said.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
(END) Dow Jones Newswires
March 13, 2018 02:47 ET (06:47 GMT)
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