Miners: Feeling Pain of Low Metal Prices Enough to Close Capacity?

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Analysts and commentators have been saying for the last year that falling commodity prices will cause mine and smelter closures across a whole range of base metals and even some precious metals, but so far the reaction has been limited.

The FT Editors note points out the difference between the oil market where OPEC can cut production en masse by coordinating output at a third of global producers, and the metals producers who inevitably engage in a game of chicken, hoping their competitor will blink first and close.

The note quotes Australian bank Macquarie saying marginal producers of iron ore, zinc, thermal coal, ferrochrome, nickel and aluminum are all losing money at current prices, a point we will come back to in a moment. First, the note makes an interesting case why the larger — indeed, the largest — producers have more incentive to close capacity than their smaller rivals, even though they probably have on average the lowest-cost production facilities.

First, as the largest suppliers by definition, they have the greatest ability to influence the supply-demand balance of a market by cutting production.

Second, by announcing their intentions publicly, they make it easier for other companies to follow suit: it is less of a challenge to persuade politicians and investors that cutting supply is necessary if the largest company in the sector is doing the same thing.

Finally, just as Saudi Arabia, as the top oil producer, can exert a powerful influence on market sentiment, so too can the largest miners in a sector — simply by announcing their intentions.

We have written on several occasions about announcements by Rusal that they are considering closing 4-6 percent of their higher-cost production in the second half of 2012 if prices don’t rise. Norsk Hydro said last week it will shut its 180,000-ton-per-year Kurri Kurri aluminum smelter in Australia due to low aluminum prices and a dismal economic outlook, not helped by a strong Aussie dollar.

And what about China? Continued in Part Two.

 

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