Commodity Blog

Xstrata forecasts mineral production cutbacks will lead to shortages and higher prices MINING group Xstrata on Friday said cutbacks in mineral production in response to the global recession could come back to haunt buyers as prices rise significantly due to shortages once demand recovers in response to a raft of stimulus measures implemented to deal with the global recession.
Commodity prices have plummeted due to flat demand as major consuming countries grapple with the worst global recession in more than six decades.
CE Mick Davis said major and junior miners had been forced to slash capital expenditure and postpone expansion projects due to uncertainty about the future.
He said further delays to add new production capacity to replace ageing mines were providing the perfect conditions for a shortage of commodities, which could result in ”significant price increases” once global industrial production and demand for commodities resumed their long-term growth trend.
Mining firms, some with operations in SA such as Xstrata and Anglo American, have drastically cut back on production, and announced plans to reduce staff in addition to implementing cost-saving measures to survive the economic downturn.
Xstrata recently announced that in response to weaker demand for ferrochrome, its Xstrata-Merafe chrome venture had progressively suspended the operation 17 ferrochrome furnaces in SA, which was equivalent to 80% of annual production capacity, prioritising lower cost, energy-efficient production from the Lion and Lydenburg Premus smelters.
Anglo also announced a 10% cut in its global workforce, which would be reduced by 19000 by the end of the year as part of a drive to save up to $2bn annually between now and 2011.
Writing in Xstrata’s annual report for last year, Davis, however, said there was a glimmer of hope that measures taken by governments in Europe, Asia and US could provide the stimulus to revive economic growth, which would benefit mining firms.
He estimated that stimulus packages announced in major commodity-consuming countries such as China, Japan and the US exceeded $1,7-trillion, which, together with loosened monetary measures to encourage growth, were expected to ease economic conditions, laying the perfect ground for miners to start increasing production.
“A very significant proportion of this total — for example, more than 70%, or $400bn, of China’s total investment — has been earmarked for metals-intensive infrastructure investment and is consequently expected to bolster demand for commodities.
“When Organisation for Economic Co-operation and Development economies return to a growth phase, the effect of demand growth, coupled with greater commodity supply constraints, has the potential to lead to a rapid increase in commodity prices and demand,” Davis said.

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