Editorial: Miners smile at falling oil prices

Mining companies struggling to cut cash costs have caught a welcome break in September and October, as global oil prices have fallen sharply to two-year lows.

The international benchmark Brent crude price was US$84.18 per barrel at press time — down 25% from June — while West Texas Intermediate traded at just US$81.67 per barrel, falling US$3.90 on Oct. 14 alone. Many oil and gas analysts see another 5% downside on oil prices over the next 30 days, as China’s economic growth slows and Germany approaches a recession.

The sharp Oct. 14 dip followed the International Energy Agency’s lowering of its forecast for global oil demand in 2014 by 200,000 barrels per day.

While part of oil’s price decline reflects a weakening global economy — which has similarly translated into softer prices for metals and other mined commodities — miners can draw some comfort that the other big reason for the decline is a good old-fashioned price war between the globe’s biggest players: Middle Eastern oil producers, led by Saudi Arabia, are determined to retain their market share in Asia and Europe in the face of higher oil output from U.S. shale oil, and Canadian oilsands.

The U.S. shale oil boom has been so phenomenal that the country is looking at substantially reduced oil imports and is encouraging more exports.

To fight back, Middle Eastern oil producers are willing and able to step up their relatively low-cost production in order to drive oil prices below US$80 per barrel and render uneconomic any new U.S. shale oil and Canadian oilsands production.

With the Canadian loonie taking on more and more of the character of a petrodollar as the years go by, it’s no surprise that the Canadian dollar has taken a major hit along with oil, and now trades at five-year lows to the surging greenback.

While the weaker loonie is of concern to Canadian consumers, businesses and governments, it’s another bit of good news for miners with operations in Canada, who pay out salaries in Canadian dollars and sell their products in U.S. dollars. The double effect of falling oil prices and a lower Canadian dollar should be fully seen in the fourth-quarter cash-cost numbers.

And if Canadian miners are fretting about their stalled stock prices of late, they can be grateful they’re not in the oil patch: energy stocks are down 19% since the end of August. While Canadian stock indices were hitting record highs only six weeks ago, the crash in oil stocks has pulled the main TSX index down 10.4% since the start of September, crossing the traditional 10% level that signals a correction.

As the year winds down, we’ll see how much collateral damage the mining sector endures as the oil sector swoons. But in the short term, all miners everywhere can rejoice in their cheaper oil bills.

• Speaking of high-stakes commodity games, the iron-ore mining giants look to be as committed as ever to retaining their market share in the face of declining iron prices, with the unstated goal of driving out high-cost competitors.

With iron-ore prices now settling around the painfully low US$80-per-tonne range, off 40% from the start of the year, Rio Tinto’s CEO Sam Walsh reassured that “it’s a cyclical industry. We shouldn’t panic when there is a blip in iron-ore pricing, the fundamentals are strong for the industry … there will be demand for our product.”

Rio Tinto saw its iron-ore output rise 5% in the third quarter, entrenching it as the world’s second-largest producer after Vale. Rio Tinto is also holding steady on its plan to produce 295 million tonnes of iron ore globally this year, including from its Canadian operations, and sell 5 million tonnes from stockpiles. Rio is the lowest cost producer at US$44 per tonne, but BHP Billiton is not too far behind.

BHP, meanwhile announced two weeks ago that it would add another 65 million tonnes to take its annual iron-ore output to 290 million tonnes.

BHP Billiton’s iron-ore president Jimmy Wilson said in a release that BHP “continues to see healthy demand growth for iron ore in the mid-term, as Chinese steel production is expected to increase by approximately 25% to between 1 billion and 1.1 billion tonnes in the early- to mid-2020s.”

As an example of a high-cost iron-ore miner driven out of business by the super-majors, look no further than Sweden’s Northland Resources, which announced in September that operations “will be halted indefinitely, as a consequence of the company’s extremely constrained liquidity. For the same reason, the company is forced to give most of its employees a notice of termination.”