From Alcoa to Freeport, Metal Producers See Cost Creep Set In – by Joe Deaux and Danielle Bochove (Bloomberg News – February 2, 2018)

Mining and metal companies are rediscovering the downside of rallying prices: higher costs. A sharp rebound in commodity markets in the past two years put producers in a profitability sweet spot after years of cost-cutting to cope with low prices.

Now, as the upturn matures and the higher cost of energy and other materials starts to bite, some companies are beginning to struggle to maintain margins.

As the quarterly earnings season unfolds, companies from Alcoa Corp. to AK Steel Holding Corp. have seen their shares slump amid signs that cost creep is eating into profit.

Machinery giant Caterpillar Inc. said it expects higher material costs to mostly offset price increases for its products. Freeport-McMoRan Inc. also flagged the effect of oil’s surge in its earnings call.

Unit costs for miners probably will rise 5 percent to 10 percent this year, with energy and currency looming as the biggest immediate pressures and wage inflation more likely toward year-end, according to Roger Bell, director of mining research at Hannam & Partners LLP. Costs may also rise as producers go after more “marginal tons” by mining trickier areas, he said.

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