The metals sector is bracing for a wave of mine shutdowns and development project cancellations amid a deepening crash in commodity prices.
Plunging metals prices are forcing executives to reconsider the economic viability of mines as commodity values fall toward the cost of production at many operations.
Copper, considered a gauge of economic activity, fell to its lowest level in 20 months on the London Metal Exchange Monday, closing at $5,560 (U.S.) a tonne or about $2.52 a pound. Aluminum and nickel plummeted to values not seen in more than two and a half years, while zinc skidded to its lowest point since November, 2005. Global mining stocks were rocked by yet another severe selloff as investors abandoned the sector in droves.
“It just got a whole lot scarier,” said Bart Melek, global commodity strategist at BMO Nesbitt Burns Inc., in an interview.
Mr. Melek expects base metals producers to scale back production. High-cost mines now in production and development projects that made sense only in times of record prices will be the first to go.
“In copper, we're starting to approach the marginal cost of production right now. We're probably at it. I suspect it will get pushed lower and we will see robust supply-side action,” Mr. Melek said.
The fall in commodity prices, prompted by fears a U.S. recession will spread to Europe and Asia and sap demand, has already led to the shutdown of several operations.
Citing high costs and poor market conditions, Alcoa Inc. shuttered its Rockdale, Tex., aluminum smelter last week, laying off about 660 workers.
Rio Tinto Alcan , the world's largest aluminum producer and the successor to Alcan Inc. of Montreal, believes much of China's aluminum output costs more to produce than current commodity prices.
“A substantial portion of the Chinese primary aluminum industry is in a negative cash position now. We're starting to see signs of some response to that,” Rio Tinto Alcan chief executive officer Dick Evans said in a recent interview.
Mr. Evans said the company's own aluminum smelter in China could be mothballed amid the price correction.
Nick Poll, the chief executive of Mirabela Nickel Ltd., which is struggling amid the credit crisis to secure financing for its $387-million Santa Rita nickel sulphide project in Brazil, is predicting that higher-cost nickel laterite projects will fall by the wayside.
“I think we'll see a reduction in production, particularly by laterite producers. I also do not see a lot of new nickel projects coming on stream because most of them are high cost,” he said.
Mr. Poll believes his project, although low grade, will succeed because it will produce nickel at a cost of $3.10 a pound. He is hoping Mirabela will have a $280-million debt facility fully syndicated by mid-November. The credit crisis means the lending rate will likely increase by a full percentage point.
“People say grade is king, but really, cost is king,” he said.
Unlike copper and nickel, zinc prices have been in trouble for more than a year. In August, Winnipeg's HudBay Minerals Inc , closed its Balmat zinc mine and concentrator in New York state, blaming low prices and operational troubles.
The company's CEO, Allen Palmiere, told Reuters that while HudBay's operations are profitable, continuing declines in metal prices could force it to preserve cash.
