Miners Retrench in Australia – by Rhiannon Hoyle (Wall Street Journal – September 5, 2012)


SYDNEY—Australian mining companies are slashing spending as the country’s economic outlook dims.

The world’s fourth-largest producer of iron ore, Fortescue Metals Group Ltd., FMG.AU -4.81%said Tuesday it will slice operating costs by $300 million and save a further $1.6 billion by delaying the development of a large iron mine in Western Australia’s Pilbara region. The company will also cut several hundred jobs.

Rio Tinto RIO.AU +1.66%and BHP Billiton BHP.AU +0.93%are also planning cutbacks amid darkening economic outlooks around Asia, slumping prices for industrial commodities and rising production costs.

Mining companies in Australia are moving quickly to protect profits as the price prospects for major industrial commodities worsen—posing a risk for the resource-rich nation’s economy. Australia recovered quickly from the financial crisis in 2008 and grabbed a place among the world’s fastest-growing developed countries largely due to mining. That status is now at risk as companies such as BHP, Rio Tinto and Fortescue aggressively rein back their investments.

The mining companies’ sudden change in strategy is sparking concerns that Australia’s mining boom has ended. As 2012 began, Australia’s miners were complaining of a shortage of manpower and scouring the world for skilled labor—paying some specialist truck drivers around $250,000 a year to work in Western Australia. Now the industry is shedding jobs.

The price of iron ore, Australia’s largest single export, has dropped by a third in the past two months. Tuesday it fell to US$86.90 a dry metric ton, its lowest level since October 2009. The price of coal, Australia’s second-largest export and a major contributor to the profits of the country’s biggest mining companies, has also plummeted, with thermal coal—used to generate electricity—down 20% this year.

The iron-ore decline “has been much sharper than anyone anticipated,” said Fortescue Chief Executive Nev Power, and now there’s concern a recovery will take a little longer than first thought. Government forecasters are warning there’s further to fall for industrial commodities such as iron ore, coal and copper.

“If prices continue to decline—and they declined substantially in the last six to eight weeks—then that clearly will have a negative outlook in terms of what companies are prepared to invest over the long term in projects,” Quentin Grafton, chief economist at the Bureau of Resources & Energy Economics, said in an interview Tuesday.

For Fortescue, based in Perth, that means backing off plans to raise the annual iron-ore output rate at its Pilbara operations to 155 million metric tons by next June. Instead it will aim to produce at a rate of 115 million tons by March, and then assess its growth plans based on market conditions.

For the rest of this article, please to the Wall Street Journal website: http://online.wsj.com/article/SB10000872396390443847404577630892150430600.html?mod=googlenews_wsj

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