METALS COST INFLATION
We expect that the more important
regions which could potentially demonstrate such activity would be Europe and China. Furthermore, those industries which have particularly high barriers to exit would include aluminium and steel.
In Europe ... Alcoa recently agreed to delay the
Figure 2: Fourth Quartile Costs; % China & EU
closure of one of its Italian smelters after meeting with union leaders and Italy’s Ministry of Economic Development. While this is a relatively small facility it underscores a determination by European governments, particularly in the hard-hit peripheral zones, to support employment (the Portovesme smelter employs about 3.3 people per thousand tonnes of capacity). We believe that there are likely similar albeit lower profile examples of such activity within much of Southern Europe; particularly in the steel sector.
20% 40% 60% 80% 100%
0%
Source: Deutsche Bank
In China ... China’s historic ideology (communism) puts the country
firmly in the camp of a region which responds atypically to value loss. Furthermore, the country’s impressive growth in capacity, particularly high-cost capacity, can create considerable distortions in terms of how the industry as a whole responds to different pricing regimes. We would expect that, depending on political/economic
conditions, various firms within China could operate at a loss (in the interests of the State) for extended periods in order to maintain employment levels or perhaps to avoid a loss of face through industrial failure. Figure 2 shows the geographical make-up of the fourth
quartile of the industry cost curve for selected metals/materials; specifically the dominance of China and Europe. We can clearly observe that high-cost aluminium, nickel and iron ore production are dominated by these regions and thus could be potentially prone to a low sensitivity to economic loss.
Extracting Value Given the relentless increase in pressure
Chile: Mining companies face higher royalties and taxes as the Chilean government looks to restructure parts of its economy (particularly education reform). The current 20% tax rate may remain in place rather than be allowed to fall back to the normal 17% rate. Furthermore sliding scale royalties are being investigated for the copper mining industry, depending on profitability.
Democratic Rep of Congo: A new tax code is to be implemented. This may entail an increase in the 5% stake which is ceded to the government upon initial production of a mining operation.
Indonesia: Regulation is being reviewed which may limit foreign ownership to 49%. The government has also recently proposed a 25% tax on exports this year, rising to 50% in 2013.
on governments to maintaining economic growth there has been a coincident increase in their determination to reclaim value from resource industries. Ostensibly, this is to distribute value to other parts of the economy and/or to lessen the fiscal burden to the consumer. While this ‘resource nationalism’ is not really new, there does
We believe that domestic costs ... may be one of the most significant challenges for resource companies going forward
Currency & Labour Costs We believe that domestic costs,
seem to be more anecdotal evidence that it is becoming more accepted; where even countries with a long track record of mining history are finding ways of extracting value from extractive industries. Below are a few examples:
Australia: Recently passed laws for a new 30% tax on iron ore and coal mine profits.
including labour and the effects of producer currencies may be one of the most significant challenges for resource companies going forward. This is due to: 1) Squeeze in labour supply in many areas (including China),
2) The considerable strength which June 2012 67
Aluminium Nickel Iron Ore Zinc Gold Copper
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