Answered: 1) How do potential changes in the…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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Big Miners at Odds Over Whether Worst Has Passed - Wall Street Journal
by: Rhiannon Hoyle (see images below)

1) How do potential changes in the Chinese economy affect the demand for minerals as well as the decisions made by mining companies?

2) Why is it difficult for mining companies to get the timing right with regard to the development of new mines?

3) “Mining typically follows an about four-year boom-to-bust cycle….” Is there any reason why they cannot use their historical data make their investment decisions and demand forecasts?

4) Mining companies are facing a potential “high price for mineral commodities” state of the economy and a potential “low price” state. Why then are they visiting factories and scrapyards?

5) How do environmental policies affect the demand for coal? Why are mining companies concerned about their ability to predict changes in environmental policies?

"It is really important for companies planning ahcad," said Nortbeastera's. Ms. Erten "Obviously you don't want to invest
in a commodity that will see declining prices for more than 20 years."
Still, mining executives often read the market wrong. The world's big miners were criticized for flooding the global
market in recent years with iron ore just as demand slowed, leaving the world awash in supplies of the steclmaking
ingredient.
Commodity forecasts also are upended by innovation and political change. Coal's outlook is being yanked about by
evolving Chinese policy on local industry and air pollution.
Moreover, new operations are slow to start. A meaningful copper mine takes an average 12 years to move from discovery
to production. Rio Tinto's expansion of Qxu, Tolgoi redraws the copper-supply outlook with first output due in 2020,
potentially delaying a recovery in prices.
"It is very hard to get your timing right," said Graham Kerr, CEO of South32 Ltd. , a mining company built from BHP
Billiton castoffs. "Picking when the steel market is going to be at its peak, or picking when copper will be in oversupply
or deficit, the industry hasn't been particularly good at it."

Big Miners at Odds Over Whether Worst Has Passed
Rio Tinto is ready to dig again while BHP and others hold back major investments
SYDNEY-Global mining companies face an urgent dilemma in the grip of a prolonged commodities downturn: whether
to bet heavily on new projects absent firm signs of an upturn-or wait until a recovery in prices gathers pace.
At the heart of cach company's decision is whether China is finished as an engine of torrid resources demand, or about to
ramp up spending, this time on consumer goods such as air conditioners and refrigerators. If the latter, it will require
commodities not at the forefront of China's industrialization so far.
For mining executives, it means navigating a commodity cycle that experts say is different from any in the past 100 years.
Mining typically follows an about four-year boom-to-bust cycle, although some industrial-led sunerexcles can last
decades. It is unclear whether the industry is now on the cusp of a renewed boom or still unwinding from the last one.
Rio Tinto PLC is among the few mining companies betting big. In May, the Anglo-Australian miner agreed to a $5.3
billion expansion of a Mongolian copper mine that will ease its earnings reliance on iron ore. It also is moving forward on
a $1.9 billion bauxite project in casterm Australia for aluminum and on an iron-ore mine in the country's remote western
Pilbara region.
"The growth strategy of Rio going forward will be: Build and buy smart," said Jean-Sébastien Jacques, who became Rio
Tinto's chief executive in July.
Rio Tinto thinks copper, rather than iron ore, will be among the first commodities to recover. Mr. Jacques has projected a
shortfall of the metal to emerge within two or three years.
Other miners are being more cautious.
"We are confident that the market right now doesn't need any more tons," said Fortescue Metals Group CEO Nev Power,
whose iron-ore company is holding back production expansion.
It is very hard to get your timing right.
- Graham Kerr, South32 CEO
BHP Billiton Ltd. , which has long wanted to expand its Olympic Dam copper mine, scaled back its ambitions due to
slumping commodity prices. It is testing ways to extract minerals more cheaply at the site, but those trials will take at least
until 2019 to complete, meaning an expansion won't happen until at least next decade.
"We might be a little bit late to the party," said Jacqui McGill, BHP's executive responsible for Olympic Dam.
The magnitude of the last rise in metals prices was greater than the boom years of U.S. industrialization or reconstruction
of postwar Europe. Bilge Eten, assistant professor at U.S.-based Northeastern University's economics department, said a
more than tripling of metals prices in the 13 years through 2012 was at least double any of three prior suReTexeles-
defined as lasting at least two decades. More commodities also rallied in unison than any time in recent memory.
With a decision on the Olympic Dam project still to be made, a team of BHP analysts regularly visits factories and
scrapyards for clues on future commodity demand.
"How much copper was recovered from a car two years ago, how much copper was recovered from a car five years ago,
how much copper we think will be recovered from a car in 10 years' time? Those are the trends we're looking for," said
Amoud Balbuizen, BHP's executive responsible for assessing global commodity demand.
BHP also turned to Asian makers of air-conditioning units to test its commodity-price forecasts.
China is expected to sell commercial and residential air-conditioners worth a combined $70.5 billion this year, according
to market research consultancy IBISWorld. Each unit typically requires about 5.3 kilograms (11.7 pounds) of copper.

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