Stranded Hotel in Australia Emblem of Mining Bust: Commodities

Stranded Hotel in Australia Emblem of Mining Bust: Commodities

A prefabricated six-story hotel, once destined to house BHP Billiton Ltd. (BHP) workers, is sitting in 126 boxes stranded on the Melbourne city docks. The stalled project is a sign of the deepening global slowdown in mining.

The contents were to have been assembled 1,990 miles away at Port Hedland, where BHP planned to use the hotel as temporary housing for its estimated $22 billion harbor expansion to export more iron ore. That was before the world’s biggest mining company scrapped its plan, and the hotel developer went bust.

Global capital spending by mining companies is set to drop by a third next year to $96 billion, from a record $141 billion last year, according to UBS AG estimates. Producers have slowed expansions and delayed projects on expectations that commodities prices have passed their highs, after economic growth began slowing in China, the biggest buyer of metals.

“Clearly the rate of new approvals has almost dried up” for mining projects, Michael Elliott, sector leader for Ernst & Young’s global mining practice, said in an interview from Sydney. “A lot of that has been rethinking what rates of return companies now require from these new investments.”

The 117-member Bloomberg World Mining Index has dropped 8.2 percent this year, with BHP down 3.9 percent, and is set for its first decline in four quarters. In contrast, the Dow Jones Industrial Average rose 10 percent and hit a record this month.

Billionaire’s Caution

Glencore International Plc (GLEN)’s billionaire Chief Executive Officer Ivan Glasenberg last month called for the big miners to stop building new mines and blamed their outgoing leadership for swamping the industry with new output and failing to get returns for shareholders.

The chief executive officers of BHP, which put $68 billion of projects on hold last year, Rio Tinto Group and Anglo American Plc have quit or announced plans to leave after investors balked at multibillion dollar project writedowns.

“I’m less confident in the mining sector opening their pockets, particularly given the CEO statements that we’ve seen across the board and the outlook in commodity prices,” Richard Leupen, chief executive officer of Sydney-based engineering contractor UGL Ltd. (UGL) whose clients include BHP, Rio and Royal Dutch Shell Plc, said on a conference call last month. Cost cutting is “endemic in the sector,” he said.

BHP in August mothballed its expansion at Port Hedland, already the world’s biggest bulk export terminal. Melbourne- based BHP appointed Ernst & Young LLP as receivers in November to recover A$50 million ($51 million) it had advanced to Port Village Accommodation Pty., the hotel developer now in receivership. BHP said in an e-mail that the receiver has sought restructuring proposals from third parties.

Salvaging Hotel Project

Hickory Group, the building contractor, is in talks with various groups, including in Port Hedland, to buy the completed first stage of the steel, aluminum and glass hotel, Michael Argyrou, managing director of the Melbourne-based company, said in an interview. The parties were “serious” and Hickory is hoping to complete a deal within the next few months, he said.

“The plan was to have Hickory send our people up there to put together the parts like in Lego to create the hotel,” Argyrou said. “They’re still sitting at the docks.”

Megan Ball, a spokeswoman for Ernst & Young, declined to comment on Port Village Accommodation as the company is still in receivership.

An expected slowdown in demand for minerals over the next five years makes cutting costs and boosting productivity a priority, Andrew Mackenzie, the incoming CEO of BHP, said last month in an interview with the Australian Broadcasting Corp.

Peak Prices

Marius Kloppers, whom he will succeed in the top job on May 10, said Feb. 20 there won’t be a return to the peak commodity prices of 2007.

Eleanor Nichols, a Melbourne-based spokeswoman for BHP, declined to comment on BHP’s project deferrals, and referred to Kloppers’ October speech at the Brisbane mining club where he noted supply catching up with increased demand levels to produce “more moderated pricing.”

In the past decade, companies built and expanded mines, port and rail after struggling to feed unprecedented demand growth from China. This prompted the Standard & Poor’s GSCI Spot Index of 24 raw materials to increase almost fourfold since 2001.

The building spree is still being played out. Xstrata Plc (XTA), the world’s fourth-largest nickel producer, is completing the $5 billion Koniambo project in New Caledonia, Rio is due this year to start the $6.6 billion Oyu Tolgoi copper and gold mine in Mongolia and Anglo American Plc (AAL) is building the $8.8 billion Minas-Rio iron-ore project in Brazil. Francis de Rosa, a spokesman for Xstrata’s coal unit, declined to comment on project plans, as did Rio Tinto spokesman Bruce Tobin.

Bull Time

“During the bull time of the cycle the big miners were throwing everything at everything,” Joel Crane, a Melbourne- based commodity analyst with Morgan Stanley, said by phone. If new projects are shelved “that may lessen the severity of the very steep decline in prices most analysts have in their forecasts,” he said.

Investors cut wagers on a rally for commodities to a four- year low in the week ended March 5 on signs of surplus supply and concern demand from China is slowing. The four-year commodity rally to Dec. 31 led to record prices for everything from gold to copper. Gold prices probably peaked in 2011, Credit Suisse said last month in a report, while Citigroup Global Markets Ltd. in a January report cut its price forecasts for coal and nickel.

“We expect our super-cycle sunset thesis to continue to play out in 2013,” Citigroup analysts Heath Jansen and Jon Bergtheil said in the report. China was becoming a “far less commodity intensive economy” just as a number of projects were set to deliver first production this year, they said.

Mothballing Projects

The super-cycle hasn’t ended, according to New York-based hedge fund Galtere Ltd., whose founder chief investment officer Renee Haugerud said in December that global supplies are at 20- to 40-year lows as growing populations and urbanization in emerging markets will fuel raw-material demand. Still, he added that agricultural goods will outperform basic materials.

Further suspension and mothballing of projects may occur in sectors such as nickel, coal, aluminum and alumina, said Morgan Stanley’s Crane. They also may extend into iron ore, though “you’ll probably see less cancellations in copper.”

“There may be a lull in terms of new capacity put on line from around 2015 onwards,” Christian Lelong, a Sydney-based commodities analyst with Goldman Sachs Group Inc., said by phone. “That could help to tighten the market at that point. So if you’re looking for some upside caused by project deferrals I would probably flag met coal, but you will not see it for the next couple of years.”

High Costs

BHP’s “very high-cost” Daunia and Caval Ridge coking coal projects in Australia’s Bowen Basin will probably be delayed, while Xstrata was unlikely to develop the A$6 billion Wandoan thermal coal project, said Sydney-based UBS analyst Tom Price.

Vale, BHP and Rio, which together control about two-thirds of seaborne iron ore supply, still are spending about $47 billion on new and bigger iron ore mines from Brazil to Australia. The introduction of new supply has prompted Deutsche Bank AG and JPMorgan Chase & Co. to predict a second-half slump in prices. Vale and Rio are unlikely to develop anytime soon their separate ore projects in Guinea, estimated to cost a total of more than $20 billion, Price said.

To contact the reporters on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; Soraya Permatasari in Melbourne at soraya@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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