Emerging Power Shift in Mining Industry

Posted by: Mark Scott on November 04

In a sign of the quickly-shifting power struggle in the mining sector, Brazil’s Vale — the world’s largest iron ore producer — said on Nov. 3 it had withdrawn a request to Asian clients for a 12% price increase in 2008 iron ore contracts. Iron ore is the key component in steel. That’s a marked change from earlier this year when the Brazilian company negotiated a 71% jump in the commodity’s price. Like it or not, steel producers worldwide, particularly in China, are cutting back on production as the global economy teeters towards recession. Falling demand for iron ore means steelmakers, not mining companies, now are in the driving seat – and the shift may lead to further commodity price cuts over the next 12 months.

Only nine months ago, Vale, quickly followed by rivals BHP Billiton and Rio Tinto, commanded top-dollar prices for iron ore. Yes, Western economies were spluttering, but the so-called ‘decoupling’ of emerging markets — the idea that countries like India and China could grow even when the U.S. and Europe were faltering — was expected to keep demand for commodities high. That theory pretty much has been debunked, for now.

So where does that leave mining firms, steelmakers, and — more importantly – consumers who eventually buy the end products?

Well, commodity prices are likely to fall over the next 12 months as global demand contracts. Analysts reckon iron ore prices, for example, could fall between 15% and 30% next year -- the first drop in seven years. That, combined with other factors, such as tumbling freight costs, should translate into cheaper products as the benefits from falling commodity prices (in theory) are passed on to consumers.

Yet don't expect depressed commodity prices to stick around for too long. Economists predict domestic consumption in emerging markets should pick up by 2010, consequently increasing demand for commodities like iron ore, copper, and coal. That will probably tilt the power back in favor of mining companies, which already are struggling to keep up with demand due to rising input costs and a lack of qualified personnel.

All that means the so-called mining 'super-cycle' (a prolonged growth spurt buoyed by demand from developing countries) is still in play. The next 12 months probably represents a plateau, not an outright decline, in commodity prices.

But for Vale, BHP Billiton, and Rio Tinto, a certain level of price correction is inevitable. No one expected them to negotiate almost triple-digit increases in commodity contracts every year. That bodes well for steelmakers and consumers, at least in the short-term.

-- UPDATE -- BHP Billiton confirmed on Nov. 4 that it had received a 'statement of objections' from the European Commission about its $80 billion takeover bid for rival Rio Tinto. The EC declined to provide specifics on the objections, although analysts say Europe is concerned the combined company would hold a near monopolistic position in several commodities. If the deal goes ahead, BHP and Rio could be forced to sell off several mines, particularly in Australia. In a statement, BHP said it would "work cooperatively with the European Commission and, in accordance with the established merger review process, will be responding in due course to address the issues raised." Last month, Australian regulators gave a green-light to the proposed acquisition.