[miningmx.com] — BRAZILIAN miner Vale’s view that iron ore prices will likely remain above $150/t for the next five years echoes a view that is increasingly attracting airplay over the last few weeks. In Vale’s view, the wall of iron ore projects may not see light of day, or not any day soon, owing to a combination of technical, geopolitical, infrastructural and skills related risks to new projects.
According to a report by banking group, Citi, last week, it’s not just the iron ore price that is set to benefit from supply-side constraints: nearly every single metal is similarly affected.
In Citi’s report it examined over 400 greenfield projects globally carrying a 2020 deadline or earlier – a total of some $500bn in committed capital. If developed, some 9 million tonnes of new copper will be produced a year; some 684 million tonnes of iron ore, and 380 million tonnes of additional coal will hit the market annually.
The thunderbolt, however, is that a combination of development issues, such as sudden government related policy changes for instance, might see as much as a quarter of these new projects – $125bn worth – “highly unlikely to be delivered,’ says Citi.
In addition, many more projects are “at risk’, according to Citi, which makes only a small portion of total projects likely to be developed. In the production of iron ore, for instance, only 30% of new production is “likely’ to see light of day; and just over a fifth of nickel projects will be developed. Alarmingly, or happily depending on where you think the commodities market is going, there are no metals where more than 50% of planned new production will actually get commissioned, says Citi.
What’s interesting about this is that it puts perspective on worries China’s economic growth is slowing under pressure of inflation and other economic stresses such as fears of a property bubble which would put the skids under the rise of China’s urban class which is supposed to be requiring all these metals to live. Certainly these are valid fears given the part China plays in the demand side of the commodities equation, but the supply side of the equation is equally, if not more, stressed.
Head of global metals at KPMG, Wayne Jansen, says developing mines is increasingly difficult for the mining companies. “There’s no doubt it’s far more complex than before to develop mines. Projects are often far from infrastructure, Governments are under pressure to enlist greater stakeholder support, and communities are having a greater say in projects,’ he says. The skills shortage, mentioned in a previous column here last week, aggravates project completion. Jansen says in-demand project planners often skip to the next project just before commissioning which creates critical delays.
Sovereign risk is obviously a biggie. One need only look at the sudden minerals policy shift in Mozambique this week which may see its government helping itself to a 5% free-carry in certain designated strategic projects, such as (surprise, surprise) coal. Mozambique has attracted a ton of capital lately on the basis of its investor friendly attitude to the billions of tonnes of coking coal it possesses. Suddenly, the indigenisation in Zimbabwe, the morass of bureaucracy in South Africa and the somewhat eccentric calls for nationalisation in Namibia look, well, de rigeur!
There are some other interesting facts that emerge from Citi’s report that, not so incidentally, has the agreement of other brokers. One is that of all the projects included in its study, 35% are being developed by the world’s top five miners which includes the likes of BHP Billiton, Vale, Rio Tinto, Xstrata and Anglo American. Does this then raise questions about forward valuations on any of these stocks? I guess so, but then what about Australia?
It is home to 38% of all planned greenfield growth. Perhaps this means the much disliked tax regime installed by Julia Gillard’s government may not engorge the national treasury as hoped. And of the top 20 projects, only seven have minerals in the reserve category suggesting the early stage development on which metals supply is predicated.
Says Numis Securities, a UK brokerage: “Whilst not as bullish as Vale [on the iron ore price], we share the view that there is certainly a risk on time-line to the development pipeline of projects where there is significant capital development, particularly in west Africa’. It also adds that, in fact, shares in mining companies have underperformed the commodity price, therefore some catch up amid the possible extension of supply deficits is possible.
