BHP Billiton, the world’s largest miner, has trimmed its outlook for commodities prices over the next three to five years, a sign that natural resources groups are braced for a lasting impact from the global financial crisis.
The miner, which has operations from Chile to Australia and produces commodities from copper to natural gas, is a bellwether for the natural resources industry.
In its latest review of internal forecasts, BHP reduced the medium-term outlook for commodities prices, according to people familiar with the matter, who added the cuts were small and did not affect the longer-term view of the market.
“The [economic] crisis has made everyone a bit more conservative,” said a senior industry senior executive. “The world is looking more complicated.”
The London Metal Exchange index, a basket of six metals, has dropped nearly 30 per cent from its most recent peak reached in April 2011. The price of copper, aluminium, lead and nickel is down year-to-date. Tin and zinc prices are up.
Investors look to raw materials for clues about oil, mining, agribusiness and trading companies’ internal outlooks, to anticipate changes in the cycle. The downgrade by BHP is likely to cement the view that the decade-long commodities supercycle on the back of China’s industrialisation has peaked.
Internal commodities forecasts are important because natural resources companies use them to assess the profitability of their pipeline of investment projects.
In the case of BHP, the changes could affect large projects including the $20bn Outer Harbour expansion to serve its iron ore operations and the multibillion-dollar Olympic Dam copper-uranium development in Australia. BHP declined to comment.
Jake Greenberg, a mining specialist at investment bank Jefferies in London, said that as BHP trimmed its internal cash flow assumptions, some projects could fall below the necessary profitability hurdle rate. The natural resources industry is reassessing expenditure plans as slowing Chinese demand growth and the European sovereign debt crisis depress the outlook for commodities prices and as rising costs threaten to erode profitability.
The mining industry is unlikely to step back from any big project entirely, but developments could be reduced in scope or proceed more slowly, executives said.
BHP had already signalled that it would take a more judicious approach to capital spending, after coming under investor pressure to show greater discipline in its plans to invest more than $80bn in several mega-projects.
Rio Tinto, which together with BHP accounts for about a third of the industry’s capital investment, has also said it is re-evaluating spending plans, while Glencore and Xstrata have suggested that they will focus on expanding current mines rather than build new ones from scratch.
Jan Nasser, BHP’s chairman, said in May that the company’s investment programme was under review, adding that the mining industry now had “more projects than cash flows”. The comment echoed those of Alberto Calderón, BHP’s head of aluminium, nickel and corporate development, who said the miner would phase or stagger its spending to reduce risk.