Share Name Share Symbol Market Type Share ISIN Share Description
Anglo American LSE:AAL London Ordinary Share GB00B1XZS820 ORD USD0.54945
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  +2.60p +0.15% 1,769.40p 1,767.60p 1,768.40p 1,801.40p 1,753.00p 1,762.80p 6,609,461 16:35:12
Industry Sector Turnover (m) Profit (m) EPS - Basic PE Ratio Market Cap (m)
Mining 19,429.8 4,075.8 183.6 9.9 24,853.22

Miners Fight to Protect Commodity Gains From Increasing Costs

12/03/2018 10:59am

Dow Jones News

Anglo American (LSE:AAL)
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By Rhiannon Hoyle 

The world's biggest miners, flush with profits from a recent commodity market rebound, are grappling with a new challenge: how to keep rising costs from eating into those hard-earned gains.

For much of this decade, mining companies have prioritized reducing how much they spend to dig up each ton of the commodities they sell, after a market slump made it harder to turn a profit. Companies including BHP Billiton Ltd., Rio Tinto PLC and Glencore PLC introduced drones and driverless trucks, cut tens of thousands of jobs and sought advice from other industries including automobiles to make their pits more efficient.

Now the sector faces a fresh cost crunch as prices for things including fuel, wages and chemicals begin to climb. Energy bills are rising following a more than 20% rally in oil this past year. Raw materials including coke, which helps to fuel iron-ore smelters, and caustic soda, used to extract alumina from bauxite, are also rocketing in price. Workers are demanding higher wages in many countries, including the copper mining hub of Chile, where truck drivers argue better metal prices should translate to fatter pay packets.

A depreciating U.S. dollar versus the currencies of top mining countries is also putting pressure on margins, as commodities are mostly sold using the greenback. The South African rand is up 22% over the past four months.

"Clearly, inflation's becoming a bigger issue," said Anglo American PLC Chief Executive Mark Cutifani. "So we've got to run twice as hard." Costs are increasing for reasons similar to those driving the commodity market turnaround: a healthier global economy and rising demand.

Miners stripped billions of dollars in costs from their operations as they sought to get a handle on budgets that spiraled during the last commodities boom.

Between 2012 and 2016, copper producers globally slashed their output costs -- the cost to produce one pound of metal -- by roughly one quarter, according to data from S&P Global Market Intelligence. Still, that followed a more-than-tripling of costs in the decade prior to 2012. S&P projects copper output costs rose in 2017 for the first time in five years.

Right now, higher commodity prices are certainly more than offsetting higher expenses. Commodity prices have climbed roughly 20% since mid-2017, according to the S&P GSCI commodities index, underpinned by a rare period of synchronized economic growth in China, the U.S., Europe and major economies elsewhere.

Miners are making huge profits once again. Rio Tinto, the world's No. 2 miner by market value, and rival Anglo American both last month reported a doubling of annual net profit. Glencore said it quadrupled its earnings in 2017.

With fuel and other necessary raw materials getting more expensive, there will be pressure to find fresh cuts elsewhere to protect margins, executives say. A further rise in mining costs could provide an additional boost to the commodity market rally, analysts say, particularly if investors bet on it causing some smaller companies to pare production.

"The one thing that comes with inflation is a better commodity price," said Anglo's Mr. Cutifani. But "we don't want to rely on rising prices," he said.

Mr. Cutifani said Anglo will race inflation to cut the costs it can, targeting an extra US$3 billion to US$4 billion in savings by 2022 through improvements to expenses, productivity and sales.

The return of inflationary pressures already sparked earnings misses for several industry titans during the latest corporate earnings season, dampening their stock-market rally. "Further cost inflation in the mining industry is inevitable, in our view, unless global economic activity slows," said Jefferies LLC analyst Christopher LaFemina. BHP and Rio, among others, fell short of his earnings forecasts because of unexpectedly high costs, he said.

Anglo American felt the sharpest sting in its South African coal division, where costs for its export operations jumped 29%.

Rio Tinto forecast cost headwinds of US$300 million in 2018, which would erase half its projected productivity improvements for this year. "We will continue to be tough on costs," pledged Rio CFO Chris Lynch.

Glencore Chief Financial Officer Steve Kalmin said the company was seeing rising prices in diesel, steel and explosives, among other things. There is also increasing competition for workers, although it is "nowhere near where things were back in the 2007-08" period when there was a scramble for basic skills, he said.

BHP Billiton cautioned of pockets of inflation in both its petroleum and minerals businesses, although Chief Executive Andrew Mackenzie played down concerns that renewed pressures would dent the miner's bottom line.

"We, as a company, feel confident that we are able to quench that and continue to drive our cost down," he said.

Write to Rhiannon Hoyle at


(END) Dow Jones Newswires

March 12, 2018 06:44 ET (10:44 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.

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