Mining is pivotal to Australia’s economy, so it is hardly surprising that the entire nation is paying attention to its central bank’s worries that the industry could falter in a year’s time. Still, while some Australian miners are shying away from new investments, arguing that the glass is half empty for the copper industry, others are banking on the glass being half full and are pushing forward with large-scale projects.
Addressing lawmakers at his semi-annual testimony before parliament, Glenn Stevens, governor of the Reserve Bank of Australia, cautioned that “the peak of the resource investment boom as a share of GDP [gross domestic product] — the highest such peak in at least a century — will occur within the next year or two. After that the rate of resource investment is likely to decline.” The central bank anticipates that in 2012 mining investments will remain at the historic high of around $145 billion a year, about 9 percent of Australia’s GDP.
Stevens’ comments should not have come as a surprise given that they came only days after BHP Billiton (ASX:BHP,NYSE:BHP,LSE:BLT) announced that it plans to postpone moving forward with expanding existing projects and undertaking new ones, including plans to develop its $20 billion Olympic Dam project in Southern Australia. The site is expected to be the fourth-largest copper mine in the world, with production of 750,000 tons of copper per year. Yet due to the fact that the price of the red metal has plunged over 25 percent from a year ago, and because BHP’s own profit for the first six months of the year tumbled 35 percent from last year, the mining giant has shelved major investment plans at least until June 2013 instead of putting projects such as Olympic Dam up for board approval this December.
Considering continued worries about the financial future of the Eurozone and China’s falling appetite for copper, BHP’s decision to cut back on new investments was not unexpected. The company’s executives have stated publicly over the past several months that BHP needs to ensure returns for shareholders in order to produce longer-term gains.
Stevens welcomed BHP’s decision to put Olympic Dam and other projects on hold. “We have long expected that there would be a very large … investment build up. You know that has to peak at some point,” the central bank governor told lawmakers. “There are a vast number of [possible projects] which, I think in truth, really shouldn’t be done because if they were all attempted, there’s already pressure on the cost side for resources companies.”
Many analysts are cautious about the red metal’s prospects in the near term, with Deutsche Bank’s head of metals research, Daniel Brebner, stating earlier this month that “prices are likely higher than they should be” for all metals, and adding that a “high probability of further disappointment” for global growth prospects is weighing on the copper market in particular. Deutsche Bank projects that copper will average $8,200 per metric ton in the fourth quarter.
Still, further monetary easing both in the United States and China, which alone accounts for over 40 percent of global copper consumption, is likely to give solid support for base metal demand moving forward. In addition, BHP’s decision to shelve the Olympic Dam expansion is expected to push other miners to put some of their projects on hold, which will tighten global supply.
Commodities analysts at Goldman Sachs believe that “the strength in apparent refined copper demand in China so far in 2012 reflects strong property sector completion growth … as social housing completions are not projected to peak until [the first half of 2013], this dynamic will likely support Chinese copper and aluminium consumption through at least the end of 2012.”
BHP’s rival, Rio Tinto (LSE:RIO,ASX:RIO,NYSE:RIO), certainly remains upbeat about copper’s outlook and expects to benefit from the shortage of the red metal that will result from BHP’s decision to postpone the Olympic Dam project.
“In the latter half of this decade, if [BHP is] not putting as much copper out as they were planning to put out, that has an impact on supply,” said the head of Rio Tinto’s copper division, Andrew Harding. The company projects that global copper demand will increase by 25 percent from current levels to 25.5 million tons by 2020, and it remains on track to develop its $6.2 billion Oyu Tolgoi mine in Mongolia’s South Gobi Desert. Oyu Tolgoi is slated to begin production next year and should reach full production by 2018.
Investors will have to wait and see how the decisions made by BHP and Rio play out. For now, both appear confident about their opposing investment decisions.
Securities Disclosure: I, Shihoko Goto, hold no direct investment interest in any company mentioned in this article.