21/11/2012 Level One

It’s not lions and tigers and bears but it’s just as nerve-racking for resource companies feeling the pinch of a slowing global economy. Commodity prices have been in a free-fall for the last few months and it’s not only the little guys that are buckling.

Fortescue Metals said in September 2012 that it was prepared for a significant drop in commodity prices and a slowdown in the mining industry. “Fortescue is not concerned. We are prepared for it, we are ready for it and we can weather any storm” Chairman Andrew Forest said. This statement followed BHP’s shelving of the mammoth $30 billion Olympic Dam project and the $20 billion Outer Harbour expansion.

Five days later Fortescue laid off 1,000 workers and announced that it would need to slash capital works spending. Fortescue has also delayed its expansion of their Pilbara iron ore mine and stated that the output would be decreased. A Pilbara power station was also sold for $300 million to reduce debt and the company is now tipped to be forced into equity raising. This equity raising is likely to be at a huge discount to the current share price, which has already halved since April this year.

Iron ore is one of Australia’s best exports, being as we have the highest iron concentrate in the world. A decade ago, our iron ore was fetching less than US$20 a tonne. This had been the case for over 10 years. In July 2012 the price was US$127 a tonne, and by early September we saw this slip to US$87 a tonne. This roller-coaster pricing is the epitome of the resources boom.

In the previous decade to December 2011, the average price of energy and metals tripled, delivering extraordinary profits to mining companies.

Below are the peaks and troughs of some of the key materials of the commodities market over the past few years:

Crude Oil$132.55 USD/bblJul 2008$41.53 USD/bblDec 2008$103.39 UDS/bblOct 2012
Coal (Thermal)$192.86 USD/tJul 2008$65.36 USD/tMar 2009$88.29 USD/tOct 2012
Iron Ore$187.18 USD/tFeb 2011$36.63 USD/tDec 2007$113.95 USD/tOct 2012
Gold$1,770.00 USD/ozSep 2011$760.86 USD/ozNov 2008$1,750.00 USD/ozOct 2012
Copper$9,880.00 USD/tFeb 2011$3,110.00 USD/tDec 2008$8,060.00 USD/tOct 2012
Zinc$3,850.00 USD/tMay 2007$1,110.00 USD/tDec 2008$1,900.00 USD/tOct 2012

Source: Index Mundi

Australia mainly exports materials such as coal, iron ore and natural gas. These raw materials are the cornerstone of industrialisation, and have been in high demand from booming industrialist nations like China and Japan.

However, in an effort to rebalance its economy, China has lowered its infrastructure growth forecasts and has instead redirected its focus to a more consumption and services driven economy that will soak up less resources.

Japan has also been showing signs of a waning economy, largely due to the Euro Debt Crisis weakening its export trade.

When Ken Henry, the Australian Prime Minister’s adviser on Asia, was asked recently whether the mining boom was over, his response suggested a rephrasing of the question to “Is boom No. 2 over?.” Mr Henry goes on to say “I would suggest to you that if this is really the end of boom No. 2, we will see boom No. 3 and we will see boom No. 4 and we will see boom No.5 and so on. My view is the minerals development projects under way in Australia have a very long way to run. There will be periods of relative weakness but I wouldn’t be writing off the minerals development story just yet.”

Not everyone is as optimistic as Mr Henry and there is still a great deal of debate. With our stubbornly high dollar making life harder for our industries, there are still a lot of hard decisions to make for our Government and businesses alike.


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