New Set of Constraints Place Downward Pressure on Metals & Minerals Project Development in 2009

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Researched by Industrial Info Resources (Sugar Land, Texas)--The Metals & Minerals Industry has quickly turned from excited confidence to an era of concerned conservatism, as a new series of economic and financial constraints has caused companies to defer project development. Metals & Minerals companies have enjoyed record profits for the past few years. Many are cash strong and have been spending on acquisitions and capacity expansions. 2008 will go down as a record year for project construction starts. Now, with the credit freeze, financial market collapse and declining product demand, companies are not only reeling in spending, but are closing plants and laying off employees. What is shocking is how fast things turned around.

Widespread Problem

The Metals & Minerals Industry can be categorized into 21 major sectors. Mining, steel and cement manufacturing make up about 80% of the project spending. All of these sectors are feeling the effects of the economic downturn. Aluminum, steel and mining project deferrals are starting to accumulate as the worldwide economic climate and sinking commodity prices impact the market. Alcoa (NYSE:AA) (New York, New York), AK Steel (NYSE:AKS) (West Chester, Ohio), U.S. Steel (NYSE:X) (Pittsburgh, Pennsylvania) and Freeport-McMoRan (NYSE:FCX) (Phoenix, Arizona) are a few of the big names being affected. Companies are scaling back production and slicing capital spending.

Metals & Minerals Industry sectors related to residential housing construction like cement and gypsum wallboard were already in a state of withdrawal before the economic collapse in fall 2008. The steel and mining sectors are the latest casualties. These sectors have experienced a five-year growth trend, spurred on by dynamic growth from developing nations like China, India and Brazil. This activity peaked in 2008. Worldwide, companies have invested in large mega-projects. Many of these are currently under construction. In North America, ThyssenKrupp (FRA:TKA) (Duesseldorf, Germany) is gearing up to install the first pieces of equipment at a $3.7 billion steel mill under construction in Alabama. Holcim (VTX:HOLN) (Jona, Switzerland), which is completing a $905 million cement plant and port in Missouri, announced last week that it would close older cement manufacturing plants in Clarksville, Missouri; and Dundee Michigan. Canadian Natural Resources Limited (NYSE:CNQ) (Calgary, Alberta) has completed construction of the $3 billion Horizon Oil Sands mine in Alberta. The company announced a reduction in capital expenditures in 2009 to $3.25 billion from more than $6 billion in 2008. For details see related November 13, 2008, news article - Canadian Natural Resources Prepares for Start-Up of Horizon Oil Sands Project.

Outlook

There is no doubt about it; capital spending will be lower in 2009. However, there remain a lot of opportunities for equipment and service providers. There just isn't going to be as much as there has been in the past few years. Industrial Info is tracking 840 projects totaling $215 billion worldwide in the Metals & Minerals Industry scheduled to begin construction in 2009. About three-fourths of that is planned outside of North America. In the short term, a shift is expected from larger expansions and grassroot construction, which have been prevalent in the steel and mining sectors in 2007 and 2008, to smaller capital projects, upgrades and consolidations, as well as maintenance as companies rein in spending. This could turn around during the second half of 2009 if economic conditions improve.

Industrial Info is forecasting a high level of project fallout in 2009. This is already happening. Project deferrals and cancellations are rising. For example, molybdenum, one of the hot commodities during 2007 and 2008, has seen prices plummet more than 50% since the beginning of the year from $30 per pound to $12 per pound. Demand for molybdenum, which is used primarily as an alloy in steel manufacturing, has seemingly evaporated as the world's steel manufacturers cut production because of low sales. Freeport-McMoRan recently deferred the development of at least $1 billion worth of mine expansions and restarts in Arizona and Colorado, including the restart of the Climax molybdenum mine in Colorado. (TIC) The Industrial Company (Steamboat Springs, Colorado), is on-site performing construction. Building erection should be complete by the end of the year, at which time it looks like contractors will be sent home.

With the current economic situation, a whole new series of constraints has arisen to deter project development. Old constraints include high energy costs and regulatory/permitting issues combined with rising project development cost resulting in a lack of qualified labor, raw materials and long-lead equipment. Now, along with these problems the new constraints added to the downward pressure on project development include weakening demand, commodity price decline, credit freeze, and financial market collapse and uncertainty.

However, it's not all gloom and doom. The market will eventually turn around. That could happen toward the end of 2009 or in 2010. Project development costs that had been at a premium are sure to drop. Energy prices are falling. Oil hit below $55 per barrel in November and natural gas is dropping along with oil. This will help companies reduce operating costs.

Longer term, coal and uranium mining development could prop up mining in 2009 because of planned power generation capacity expansions. And despite recent drops in commodity prices, many metals remain near historic highs, like gold, iron, molybdenum and copper.

Industrial Info Resources (IIR) is a marketing information service specializing in industrial process, energy and financial related markets with products and services ranging from industry news, analytics, forecasting, plant and project databases, as well as multimedia services.