Larger Font

Smaller Font

Printer Friendly

LONDON - BHP Billiton's announcement on Wednesday it is suspending its giant Ravensthorpe nickel mine and laying off 6,000 workers from its global workforce means that the last metals bull in town has bowed to the inevitable.

BHP Billiton (NYSE:BHP) and fellow global metals giants, Brazil's Vale (NYSE:RIO) and Rio Tinto (NYSE:RTP) were formerly among the strongest proponents of the stronger-for-longer view of metals prices, each investing heavily in new capacity to meet expected demand from China and the developing world.

THE LAST BULL
Vale was the first to succumb to the collapse in metal prices in the second half of 2008.

On Oct. 31 it announced production cutbacks across its portfolio, from aluminium to iron ore, in response to what it called "the new global economic scenario". That was followed on Dec. 3 by an announcement it was shedding 1,300 jobs and putting another 5,500 workers on paid leave.

Rio Tinto, which spent much of last year fending off the unwelcome attentions of BHP Billiton, followed suit on Dec. 10 with 14,000 job cuts and curtailments of both aluminium and iron ore production capacity. A second tranche of aluminium cutbacks, bringing the total to 450,000 tonnes, or 11 percent of group capacity, was announced on Tuesday.

BHP, however, held its bullish ground.

In its Q3 2008 production report, released in October, the company talked only of a softening of growth in China and of general "short term uncertainty" in the macroeconomic outlook.

The tone of the comments accompanying the Q4 2008 report released on Wednesday was very different.

"The global economic environment deteriorated sharply in the last quarter of the 2008 calendar year and we expect the market to remain weak and uncertain."

"The world has changed a lot since October," conceded BHP Chief Financial Officer Alex Vanselow at the company's news conference yesterday.

RAVENSTHORPE
The biggest casualty of this corporate readjustment to the reality of rock-bottom metals prices and imploding demand is BHP Billiton's giant Ravensthorpe nickel mine in Western Australia.

The project, linked with an upgrade of the Yabulu nickel refinery in Queensland, has been problematic from the start. Plagued by cost overruns, Ravensthorpe entered production one year behind schedule in the fourth quarter of 2008.

It is one of the new breed of nickel laterite mines, extracting a mixed nickel/cobalt hydroxide through pressure acid leach technology, a production process that has proved challenging for the handful of other companies working similar laterite deposits.

That said, though, the decision to suspend Raventhorpe in the early stage of ramp-up is as much a reflection of the collapse in nickel demand as it is of the project's own challenging technical dynamics.

The mine was due to produce 50,000 tonnes of nickel, making it one of the largest single additions to long-term nickel supply.

When Ravensthorpe was approved in 2004, BHP Billiton promoted it as a silver bullet to tackle what was expected to be a prolonged period of structural supply shortfall in the global nickel market. That shortfall has disappeared behind the ever-growing mountain of nickel stored in LME warehouses.

Also vanished is the $3.7 billion that BHP Billiton has had to write down against Ravensthorpe, the most recent $1.6 billion coming hot on the heels of the $2.1 billion announced last November.

NOT THE ONLY CUTBACK

Ravensthorpe grabbed the headlines on Wednesday for understandable reasons but it is not the only sign of BHP Billiton retracting its bullish horns.

The mining rate at the Mount Keith nickel mine, also in Western Australia, will be reduced "to preserve its economic viability."

In the United States copper concentrates production at the Pinto Valley mine will be suspended and the operations returned to care and maintenance.

It is worth remembering that production from BHP Billiton's Escondida mine in Chile, the jewel in the company's copper crown, is severely constrained at the moment due to low ore grades and mill problems, obviating the need for any further voluntary curtailment of capacity.

The company also noted it is now getting requests for deferrals of iron ore and metallurgical coal shipments from some of its long term customers.

For now it is still managing to place surplus iron ore in the spot market but coal production is due to be curtailed by 10-15 percent in the first half of this year.

Vanselov warned that more mines may have to be closed if there is no improvement in market conditions.

BEARISH NEWS

The BHP Billiton news sank the LME metal markets on Wednesday, the bowing-out of the last bull in town taken as proof of just how bad things are in the metals world.

However, the new realism from one of the world's biggest metals producers will stand the market in good stead in the medium to long term.

BHP Billiton still talks of its optimism in the longer term demand picture for metals, based on the industrialization and urbanization of China.

That is still a valid proposition, although the timeframe for any recovery is steadily lengthening.

Producers will benefit more from an eventual pick-up in metals demand if there is no massive overhang of surplus stocks caused by production cuts taking place too slowly during the downturn.

BHP Billiton, reluctantly, seems to have arrived at the same conclusion.


Subscribe to the Midas Letter today and keep abreast of opportunities and risks to your financial health.