Demand for Commodities Likely to Outrun Mining
Giants' Expansion Projects
By ROBERT GUY MATTHEWS
Mining companies, which posted record profits of more than $50 billion in 2010, are funneling cash into expanding their supplies of key raw materials. The expansion, though, is unlikely to be enough to meet robust demand and tame rising commodity prices.
Companies such as BHP Billiton, Rio TintoPLC and Vale SA are boosting capital investment but running into various head winds, which are slowing their ability to greatly boost output of iron ore, coal and copper. As a result, prices of those commodities are expected to remain high, with some forecast to climb even higher over the next two years. The price of coal has risen 32% since late last year.
One issue shaping—and limiting—investment options is the rising wave of nationalism by countries, which have signaled an intent to impose high taxes or government requirements on the businesses. Roger Agnelli, the CEO of Brazil's Vale, which generated $26.12 billion in cash from operations in 2010, is under pressure to step down by government officials who want the mining company to invest more heavily in Brazil. They would like to see more steel-making operations that could use iron ore and coal to make steel, rather than export those raw materials to steel plants in other parts of the world.
Rio Tinto Chief Executive Tom Albanese says that miners have cash available but that progress in developing or expanding new mines is slowed by delays in government permits, escalating costs for labor and machinery, and limited ports and railways. Companies have already developed the most accessible reserves and now have to dig deeper, which adds costs. They also have to extract more tons and refine them more because the reserves may not be as pure.
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