London, 25 September 2010

Capital spending on new mines is on the rise and could reach a fresh peak next year but supplies of some metals will remain acutely tight for some years as companies play catch-up after the global economic downturn. Miners hunkered down during the financial crisis and in their quest to save cash and pay off debt, capital expenditure was slashed, delaying numerous projects.

Copper supply in particular will struggle to meet the recovery in demand, with problems including falling ore grades and strikes exacerbated by delays to new production.

"Copper is the one I think that will continue to miss. Companies have been promising X tonnes by Y date at Z cost and unfortunately they are tending to miss on all three of those," said Paul Galloway, analyst at Bernstein Research. Project remoteness and the need for greater infrastructure spending were other key influences on supply of the metal used in power and construction.

This view was echoed by others. "We see that copper prices will remain high because of supply tightness," said Damian Brett, project manager at industry consultants Raw Materials Group, citing similar factors.

Bernstein predicts global mining capital expenditure will reach a new record next year, surging 50 percent year-on-year to $113 billion, to edge above the previous record of $110 billion set in 2008.

Record high gold prices have encouraged increased spending on gold projects, but money is also being poured into iron ore, copper and nickel. The spot gold price reached a record high of $1,296.10 an ounce on Wednesday.

Rio Tinto , which launched an emergency rights issue last year to help pay down its debt burden during the downturn, slashed capex by 37 percent in 2009 to $5.4 billion. Capex is due to inch up to around $6 billion this year and surge 50 percent to $9 billion in 2011.

Rio has given the green light for its Oyu Tolgoi copper/gold project in Mongolia, the Simandou iron ore project in Guinea and a $1 billion expansion of its flagship Pilbara iron ore operations in Western Australia. Meanwhile, Xstrata , which plans to spend $14 billion in capex during 2010-2012, boosted attributable capital spending in the first six months of 2010 by 51 percent to $2.0 billion. It aims to increase overall output by 50 percent by 2013.

Despite these spending increases, shortages in new iron ore projects, as well as copper are considered possible. "The companies should be able to deliver on iron ore expansions because in most cases you're talking about brownfield expansions at existing projects, so that should be more deliverable," said Bernstein's Galloway. "Greenfield iron ore is a much bigger question mark."

PIPELINE DELAYS

Stockholm-based RMG estimates that out of a total of 2,980 projects which were in the pipeline over the next 10 to 15 years, some 67 are on hold. Around 5 percent of feasibility stage projects have stalled and almost 10 percent of construction phase mines.

Bernstein predicts capital spending will reach a new peak as early as next year due to pent up demand. But RMG says it may take three to five years, boosted in particular by iron ore and coal projects, providing the economic recovery remains on track.

Companies are also constantly on the look out to buy existing mines to reduce their overall outlay. This was an attractive option, given the average cost of building a new iron ore project was over $110 per tonne and more than $13,000 per tonne for copper, according to Michael Rawlinson, analyst at Liberum Capital.

Meanwhile, the risk of more merger and acquisition activity ultimately pointed to less supply growth, suggested Galloway. Either way the current rush to bring delayed projects onstream could spell a volte-face by the middle of the decade. "We will see shortages until around 2014 and then the major metals could potentially be in over-supply," said RMG's Brett.

Ends --

By Karen Norton and Eric Onstad, Reuters - for Commodities Now