Wednesday, June 10, 2009

Scuppered Projects Resurfacing

(Export Development Canada – Peter G. Hall)

Booming commodity prices led to announcements of sizable mineral investment projects in recent years. The commodity bust saw many immediate project cancellations. Rapid evaporation of billions of dollars of anticipated spending likely contributed to the economic downturn, and to the alarming drop in business confidence. But are all of the scuppered projects on indefinite hold.

Large-scale projects that were cancelled around the world are too many to number. Suffice it to say that there were enough of them that mineral commodity-watchers quickly projected an impending second rapid run-up in prices due to supply shortages, economic downturn notwithstanding. With its heavy mineral sector interests, Canada was not exempt. Cancellations hit the oil and gas industry, with the highest-profile cuts being multi-billion-dollar oilsands projects. Key investments in a number of base metal mines were also pulled in the past year.

At first glance, plunging selling prices seem reason enough to pull the plug. But that argument only works if the projects in question needed sky-high prices to justify them. For some projects, this appeared to be the case. But for most, projects were designed to make money at much lower prices than last year’s peaks. If so, then why the headline-grabbing cancellations?

Actually, plunging prices are in fact the answer – with a twist. Input costs for these huge projects also went into freefall. Everything from steel to copper and other base metals, fuel, building materials, to machinery and equipment has seen price compression in the past year. Declines have been well into the double digits, and as such, have a marked impact on the bottom line. Read more here.