By Javier Blas in London
Published: December 14 2010 19:29 | Last updated: December 14 2010 19:29
Global spending on mining will surpass pre-crisis levels next year, according to an emerging industry consensus, highlighting rising confidence in an economic recovery led by China and other fast-growing markets.
The boom in capital expenditures, which extends to the oil, natural gas and agribusinesses, comes amid sharply rising prices for commodities such as copper, iron ore, crude oil, sugar and wheat.
The investment surge also raises the likelihood of short-term bottlenecks in the already stretched supply of equipment and services, and project delays as costs rise.
Global mining expenditure is set to hit a record $115bn-$120bn next year, above the peak of $110bn set in 2008, according to a survey of senior industry executives and consultants.
The rise is being driven by miners such as Vale of Brazil, Rio Tinto and Xstrata, who want to take advantage of generational boom in demand and pricing for raw materials.
In Australia, the hottest mining region, the government’s resources forecasting agency predicts expenditure to jump by 58 per cent year-on-year.
Separately, in energy, consultant Wood Mackenzie estimates the world’s largest oil and gas companies will spend nearly $100bn on development projects next year, up 12 per cent from 2010.
Chevron, the US second biggest oil company, announced last week its biggest ever capital expenditure, budgeting $26bn for next year, up 20 per cent from 2010.
Tom Albanese, chief executive of Rio Tinto, said the mining industry is moving into what he describes as a “growth response” to booming demand and higher prices. “There is a greater sense of optimism in the sector”
“We are entering the earlier stages of another multiyear expansion of the industry,” said Mike Sutherlin, chief executive of Joy Global, one of the largest manufacturers of mining equipment, such as excavators.
Agribusiness companies are also boosting investment, executives said. John Deere, the world’s largest manufacturer of tractors, announced this month new spending for 2011 to underwrite a record number of new models.
As natural resources companies lift investment, senior executives fear that wages and cost inflation and longer lead times will limit the supply response to booming demand and drive commodities prices higher.
“It is not yet of 2007-08 proportions, but cost inflation and lead times are again rearing their head,” said Colin Hamilton, commodities analyst at Macquarie. Runaway cost inflation and labour and equipment shortages ravaged the commodities industry in 2007-08, pushing up raw materials prices as companies missed deadlines for new projects. The problem gained notoriety when miners were forced to cut back operations after running out of tyres for their gigantic trucks.
The surge in investment after a hiatus in 2009 and 2010 in the wake of the financial crisis will trigger a bonanza for the sector’s services companies. But it could eat into producers’ profits.
As a result, executives said the cost of developing and running oilfields, mines and farms had regained its upward momentum and forecast further rises in 2011-2015. Cost inflation measures are sketchy, but consultants IHS-Cera said energy upstream costs rose last quarter for the first time since mid 2008.
Executives said the biggest cost pressures were hitting Australia, the Brazil-Chile-Peru region, the coal market in China and areas of Canada and Africa.
“The fact that overall upstream costs are trending upwards points to the increase in oil and gas activities worldwide,” said Daniel Yergin, chairman of IHS-Cera.
Alex Krueger, managing director at First Reserve Corp, the $20bn natural resources private equity investor, said increased activity in commodities was “expected to result in longer lead times for key items such as tyres and escalating costs of explosives and wages.”
Thus, natural resources executives said they were paying extra attention to procurement. John Beevers, chief executive of Orica Mining Services, one of the top suppliers of explosives to the mining industry, said that “security of supply” was replacing price as a top concern for his customers.
Additional reporting by Sylvia Pfeifer in London
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