“Things’ll go your way, if you hold on for one more day,” vocal group Wilson Phillips once crooned.
Mining companies seem to have taken those lyrics to heart, opting to maintain production as long as their cash reserves allow and in effect delay a long-awaited resolution in the supply-and-demand balance of dry commodities, according to a new note from Goldman Sachs & Co.
The nature of the metals and mining business—legal considerations combined with an ability to store excess supply for the long haul—means the industry faces a longer shakeout than in the energy sector.
“Many of the [mining] structures are no longer assets but rather liabilities due to environmental regulations,” write Goldman analysts led by Head of Commodities Research Jeffrey Currie.
“This suggests that, in order to delay the environmental costs of mine rehabilitation, the penalties associated with employee layoff and non-performance of commercial obligations, owners will operate the facilities until they run out of cash and are obliged to suspend operations.”
The trend is particularly true of U.S. coal miners, according to the analysts, and underscored by recent failed auctions of mining assets.
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