Sept/Oct 2009

Supply Side

Mining suppliers are suffering just like explorers and producers

By J. Baird

According to an article in the Globe and Mail on June 12, 2009, just 55 per cent of Canada’s mining capacity is currently in use. The Canadian mining industry’s capacity utilization rate fell by 18.1 per cent in the first quarter of this year from the previous quarter.

The production of potash, zinc, coal and nickel has been slashed in response to the commodity price crash. Depending on what happens to mined commodity prices (which are set by the global market in US dollars), this slackness in production may build even further if our dollar continues to rise.

In Sudbury, major operations have ground to a standstill. Xstrata has permanently shut its mines as it develops a new deposit. Vale Inco is in the midst of a two-month shutdown of its facilities. Instead of producing 1.8 million tonnes of ore this year, FNX expects to produce just 700,000 tonnes — nearly all of it copper and precious metals — as it waits for nickel prices to stabilize.

Natural Resources Canada reports that surveys of 795 operators estimate total exploration expenditures in Canada in 2008 at $2.8 billion, virtually the same as the previous year’s record. However, as of March, their estimates were that spending in 2009 would reach only about half of last year’s level.

Canadian mining suppliers depend on exploration spending, the construction of new and expanded mines, and ongoing production for their livelihood. All of these activities are now at very low levels and have been for about a year now. Although you will not be reading about it in the general press, mining supply firms were likely the first and hardest to be hit in the current downturn.

IndexMundi’s Commodity Metals Price Index (comprising copper, aluminum, iron ore, tin, nickel, zinc, lead and uranium) dropped by 50 per cent, from a high in February 2008 to the recent low in February 2009. From February to May, however, a 17 per cent recovery has been registered.

Hopefully, commodity prices will continue to rise, although they are still a long way from the giddy heights seen throughout 2006, 2007 and 2008. But production will not be turned on quickly. In the Globe and Mail article, Canaccord Adams analyst Orest Wowkodaw predicts that “most Canadian mines’ reaction to a sustained pickup in metals demand will be delayed by about six months.”

When the recovery does come, however, I expect that it will be bigger and better than ever. Both demand and supply have roles to play. The demand for mined commodities continues to rise over time, fuelled by developing economies like China and India. On the supply side, exploration is now largely on hold and major deposits are becoming more and more difficult to find.

On a positive note, the June 10, 2009, weekly commentary of Peter Hall, Export Development Canada’s vice-president and chief economist, held out hope that some of the large-scale projects that have been shelved because of the commodity bust will be re-started. His thesis is that when prices for mined commodities fell, so did input costs. Everything from steel to copper and other base metals, fuel and building materials, and machinery and equipment has seen price compression in the last year. Thus, on the cost front, projects are now viable at much lower commodity price levels than they were a year ago. Thus, low prices may have cancelled some projects but, ironically, may also bring them back to the table.

Of course, mining suppliers will welcome the rejuvenation of projects currently on hold, as well as news that shuttered operations will resume production.

Jon Baird
Jon Baird, managing director of CAMESE and the immediate past president of PDAC, is interested in collective approaches to enhancing the Canadian brand in the world of mining.

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