Lower costs give scant relief to metal producers

LONDON (Reuters) - Metals producers must take further cost-cutting steps to avoid closure despite the falling costs of producing industrial metals, helped by sharp declines in prices for energy, raw materials and labour.

Big parts of the industry, including aluminium used in transport and construction, are making large losses because prices are so weak -- and that will not alter until more companies shut down to eradicate over-supply.

"Production costs for all metals have tumbled recently..., however decreases in metals prices have been even steeper and so a lot of producers are losing money," said Ross Strachan, principal price risk advisor at industry consultants CRU Group.

A large number of aluminium, nickel and zinc operations in particular were in the red at current prices and more will be forced to close, analysts said.

So far around 13 percent of global aluminium capacity and one-fifth of nickel capacity is estimated to have shut.

But lower costs may deter further such moves for a time.

"If producers get some relief from energy costs, exchange rates and labour costs they're going to consider holding back cutting if they've got projects that are losing money but could break even," said Adam Rowley, analyst at Macquarie Bank.

Closure can also be costly in itself, with expenses such as redundancy pay for workers or the need to keep a mine in a state of readiness.

Where possible companies could mine higher grade ore and delay exploration and development or maintenance work to lower their outgoings for a time to put off the inevitable.

The stronger dollar has also helped some big producing nations, such as Australia, Chile and Canada. Conversion into their local currency of revenue from sales of dollar-denominated material has partially offset price weakness and limited closures in some cases.

In aluminium, acute falls in prices for energy and raw material alumina have pushed smelting costs down.

Between them they account for almost two-thirds of costs. Spot alumina prices are now put at around $190 (133.1 pounds) a tonne, having traded in a $385-420 a tonne range for much of last year.

Marco Georgiou, section head of primary aluminium at CRU, put average business operating costs for aluminium at about $1,600 a tonne, down from $2,200 a tonne around mid-2008.

"I do not expect production cutbacks in aluminium to be delayed at current metal prices as prices are well into the costs curve," he said, adding that over 55 percent of producers were losing money.

At 1423 GMT on Friday the London Metal Exchange three-months aluminium price was indicated at $1,338/48 a tonne. Last week it fell to $1,316.50 and its lowest levels in over six years.

Around half of the world's zinc miners are also out of pocket, analysts said.

COPPER TEETERING

The picture is different in copper. Prices are teetering around the top of the cost curve and at present only around 10 percent of the industry is losing money, Strachan said.

But analysts still expect cutbacks, put at about seven percent of global capacity so far, to accelerate once prices weaken from present levels as over-supply becomes more evident.

"The vast majority of producers have costs of $4,000 (a tonne) downwards. Only a few companies have very cheap assets," said one.

The LME three-months copper price was last indicated at $3,181/91 a tonne.

In a more conventional economic downturn cheaper costs would encourage mining companies to eye investment in new projects in preparation for the return of better times.

Costs may well have fallen, helped by an easier labour market, falling prices for equipment, such as trucks or for materials like steel to make processing plants.

But only those sitting on a pile of cash will be in any position to do so this time due to a worldwide lack of credit. Downgrades to metals price prospects also act as a deterrent.

"Falling costs will help, but it's rather minor when compared with the change in funding issues and the perception of future prices," said Stephen Briggs, commodity strategist at RBS Global Banking & Markets.

"It's a case of one step forward, but nine steps back."

(Edited by David Evans)