Record Metal Prices Catapult Mining Profits Beyond Big Oil

Large oil producers, who for decades were the biggest earners in the natural resources industry, are being eclipsed by once smaller mining peers who are making record profits from burning metals markets.

The mining windfall is the latest sign of a boom in iron ore, copper and other metals that is sending a wave of inflation through the global economy, raising the cost of everything from electrical wires to construction beams.

In business, the top five iron ore mining companies are on track to achieve combined net profits of $ 65 billion this year, according to estimates compiled by Bloomberg. That’s about 13% more than the top five international oil producers, overthrowing a decades-old hierarchy.

The great oil surpassed by the great mining

Source: Profit estimates compiled by Bloomberg

“It’s wild,” said Mark Hansen, chairman and CEO of London-based trading firm Concord Resources Ltd. “The value has now shifted from energy to metals.”

Impressive mining profits come mainly from iron ore, the world’s second largest commodity after oil. The crucial steel ingredient is trading just below $ 200 a tonne and on par with record prices a decade ago, when ravenous Chinese demand sparked what became the commodities supercycle. Australia’s largest mining companies can extract a tonne of iron ore from the ground for less than $ 20 a tonne.

Copper prices also climbed near all-time highs, breaking the $ 10,000 per tonne mark for the first time in a decade. A basket of base metals comprising aluminum, nickel, copper, tin, lead and zinc is trading at levels only reached twice in modern history: in 2007-08 and 2011.

Copper hits 10-year high

For the big five iron ore miners – BHP Group, Rio Tinto Group, Vale SA, Anglo American Plc and Fortescue Metals Group Ltd. – this exercise will only be the second time in this century that they will earn more than their oil peers, according to estimates. It would only be the first time if their oil rivals had not been weighed down by huge depreciations in 2020.

During the previous commodity boom, which peaked between 2008 and 2011, Big Oil easily made larger profits than Big Mining. Ten years ago, for example, the five energy majors – Exxon Mobil Corp., Chevron Corp., Royal Dutch Shell Plc, Total SE and BP Plc – made an adjusted profit that was double that of the five big iron ore miners.

Now soaring mining profits are another headache for big oil companies struggling to attract shareholders amid growing concern over climate change. While miners are already returning more money to investors, oil producers are just starting to do so, having cut dividends last year.

Miners also have a better story to tell: While oil contributes to global warming, certain metals – especially copper – are essential to building a greener future based on electric cars.

Inflation problems

The mining bonanza counts beyond the natural resources industry. This is an indication that companies across multiple industries will face rising costs, which at some point could translate into broader inflation, potentially affecting bond and currency markets.

“After a year of sharp increases in commodity prices, inflationary pressures are now building downstream in supply chains,” said John Mothersole, director of pricing and purchasing research at IHS consultant Markit Ltd.

So far, central banks – notably the US Federal Reserve – have largely ignored these pressures, saying these are one-off price spikes that are unlikely to trigger an inflationary problem. The Fed said on April 28 that while inflation has risen, the increase largely reflects “transitional factors.”

Iron ore is in a dream scenario: demand, especially from China, is rampant, while supply is limited. China, which accounts for about half of global steel production, produces a record amount of metal, while industrial production is increasing in the rest of the world as huge stimulus packages fuel a recovery from the pandemic. At the same time, producers are struggling to keep mines at full capacity.

Return money

Yet the sealing of metals is based on a strategic decision taken by the big miners half a decade ago. After spending years injecting an ever-expanding supply into the global market, they tore up their growth plans and instead focused on shareholder performance. The result was that the supply practically stopped increasing and the prices started to rise again.

The good news for investors is that during this wave of high prices, they are likely to see more profits. Unlike the last commodities supercycle, miners – still plagued by a series of disastrous deals and projects – are reluctant to pour their extra income into acquisitions or new mines, choosing instead to distribute record dividends.

This point was made clear by Vale’s CEO last week, after the Brazilian mining giant released its best quarterly result since the peak of the supercycle ten years ago.

“We should not expect extreme expenses,” said Eduardo De Salles Bartolomeo on Tuesday. “There is nothing like it on our radar. And secondly – the question a lot of people ask, so I’ll take this opportunity to clarify it – there’s also no transformation or M&A on our radar. “

Big Oil is now doing the same, with companies from Exxon to BP abandoning plans to grow oil production in an attempt to regain shareholder confidence: they have cut spending on new projects and, after paying off debt , promise to reward investors rather than develop new ones. fields and refineries as they did in the previous cycle. This will likely lead to a drop in oil supply later this decade, which in turn could support prices.

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