Interesting Excerpts

Giant Mines Scramble to Cut Output
By PATRICK BARTA, ROBERT GUY MATTHEWS and ANDREW BATSON

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Mining companies -- which couldn't dig minerals out of the earth fast enough just a few months ago -- now are struggling to climb out of a very deep hole.
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Metals prices fell 35% in just four weeks last month -- the steepest decline ever recorded, according to Barclays Capital. Prices for palladium, a key ingredient in automobile catalytic converters, are down 70% since midyear as car buyers make themselves scarce. Half or more of the world's aluminum production is now unprofitable.
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Rio Tinto cut 10% of its iron-ore production last week, matching a similar move by the world's largest iron-ore producer, Brazil-based Companhia Vale do Rio Doce. On Thursday, Xstrata PLC announced plans to close two nickel mines in Northern Ontario. Alcoa Inc. has so far cut about 15% of its annual capacity.
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The mining business has been through cycles before, and is exceedingly volatile. But analysts say they can't recall a more sudden, sharp decline in prices.

Of course, this slump is still in its early days. Prices could bounce back if China's housing market regains its vigor. After all, China, India and other developing nations still need massive helpings of copper, zinc and other metals as they strive to catch up to rich countries' living standards. China currently consumes only about one-fourth as much copper per capita as Germany.

Still, at current market prices, it's hard to make money running many mines, which have high labor, equipment and energy costs. About 30% of nickel mines and more than 15% of zinc mines have turned unprofitable due to falling prices
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The swift reversal is remarkable in an industry that saw its profits increase 20-fold in five years, climbing to $80 billion in 2007 from just $4 billion in 2002. Just a few months ago, miners were struggling to hire enough workers to keep up with unprecedented global demand
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In the last major commodities downturn, in the late 1990s and early part of this decade, mining companies got clobbered. Prices for copper fell some 50% in the wake of the 1997 Asian financial crisis followed by the U.S. recession in 2001.
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The mining business didn't perk up again until demand in China began to take off around 2002 and 2003.

This time around, the biggest mining companies -- including BHP Billiton, Companhia Vale do Rio Doce, Anglo-American and Barrick Gold -- are likely to use this downturn to try to grab market share from smaller rivals, known as "junior" minors, that sprang up like mushrooms in recent years when it was easier to raise capital. While junior miners often carry heavy debt, the giant firms have built up formidable war chests over the past few years. Many are keeping an eye peeled to buy struggling smaller companies on the cheap.

The current pricing volatility has been intensified by the global financial crisis. Many hedge funds, pension funds and other investors desperate to raise cash as their stock- and bond-related holdings tumbled, rapidly sold their commodities holdings in recent months. That pushed down prices of copper, zinc and nickel more rapidly than in previous downturns.

Five years ago, nickel was selling for about $9,000 a metric ton. A year ago, that price had swollen to more than $40,000, in part because of demand, but also because so many hedge funds and other investors were piling in.

[NOT investors listen up...]

In recent months, demand for nickel has declined somewhat -- but cash-strapped investors like these have rapidly bailed out of their holdings. As a result, the price declines have far outstripped the rate of decline in actual demand for the metal. Nickel is now selling for about $11,600 a metric ton.

Ultimately though, the industry's problems are rooted in weakening demand, particularly in China, rather than the financial crisis
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Full article here

BK