Last week, we posted a look at Xstrata’s recent spending surge and opined on how this capex push hardly addresses any short-term metal price alleviations. The long-term nature of mining projects – requisite permits, tests, etc. – does nothing for metal availability, even 10 to 15 years out from now.
Recent reports show that even more mining companies are using the high-demand/high-price market to justify more spending in new and existing markets. Brazil’s MMX Mineracao e Metalicos SA announced a $2.9 billion expansion in iron ore mines, after beginning to export to China not too long ago. Ontario, the most populous province of the US’ largest trading partner, Canada, expects to see $8.5 billion in capex over a five-year period. The biggies Rio Tinto, Vale, BHP Billiton, etc., are all upping their capex significantly, with collective investment that could reach $120 billion in 2011, according to the Financial Times. That’s three times their average spend between 1988 and 2003. For context, the graph below shows Australia’s total capex by industry:
Source: Australian Bureau of Statistics
But the angle of the FT article is that this influx of capital spending mainly helps the suppliers in the short term. Those who provide earth-moving equipment (such as Caterpillar, Joy Global, Komatsu, Atlas Copco and Boart Longyear) and explosives (Orica and Bulk Mining Explosives) are expecting to see a boost in orders over the next several years. Some are already getting a taste: Joy Global, for example, experienced an 18 percent increase in Q4 profit after their orders for new equipment doubled. “Based on both market fundamentals and the discussions directly with our customers, we are confident that this is the early stage of another multi-year expansion of the mining industry,” Joy’s CEO Mike Sutherlin was quoted as saying.
But the question remains: what happens to metal prices in the interim? Sure, it’s all good for mining firms’ or their suppliers’ shareholders when their company stock prices spike on capex news, but in the climate we’re in, there’s never any guarantee that their raw materials prices won’t rise proportionally with their orders. After all, it takes metal to mine and make metal, so the historic highs we’ve been seeing in base metal prices should certainly be a consideration for suppliers. But, if the expansion investments are not made now, we’re sure to have supply droughts for longer than just the next decade.