--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, May 20 If you ever needed
an example of the corporate herd mentality, then look no further
than the stampede of cost-cutting among commodity producers
started by BHP Billiton.
Since the Anglo-Australian miner moved last August to scrap
or delay projects and slash operating costs, mining and energy
companies have been rushing to do the same.
In the past few months, no less than $15 billion of cuts in
capital and operating expenditures have been announced, and this
is likely just a small percentage of reductions still to come.
What started as concern among investors in BHP Billiton and
its fellow Anglo-Australian miner Rio Tinto over
excessive capex amid slowing demand growth for commodities from
top consumer China has spread across the world.
In recent weeks several Canadian miners have announced cuts
to capex, and newly-merged Glencore Xstrata has
promised aggressive cost-cutting, with some investors confident
it will exceed its target of $500 million in reductions.
And it's not just miners joining the cost-cutting frenzy,
with Singapore-listed commodity firms Olam International
, Wilmar International and Noble Group
announcing cuts up to about a combined $2 billion in
Wilmar isn't a mining company at all, rather being focused
on agricultural commodities such as palm oil and soybeans, and
while Noble and Olam both own assets, their core strength is in
supplying commodities to customers.
Even energy companies have been trimming costs despite not
being as adversely affected by the concern over slowing growth
for Chinese demand for resources, which has mainly focused on
metals such as copper and bulk commodities like iron ore and
Heavyweight Exxon Mobil has said it would lower
capex 4.5 percent to $38 billion this year and for the "next
several years" from 2012's $39.8 billion, while U.S. oil and gas
explorer SandRidge Energy said in early May that it would
cut spending by $300 million to $1.45 billion this year,
revising a February estimate.
Cutting costs has replaced developing new projects as the
mantra of resource companies, and it's likely that far more is
While Australia has $188 billion of liquefied natural gas
projects approved and under construction, the chances that more
will be sanctioned are dimming.
Already Woodside Petroleum, the nation's largest
oil and gas producer, has shelved its Browse LNG project in
Western Australia, saying the economics no longer stack up.
Speculation is also mounting that Royal Dutch Shell
and its partner PetroChina will defer their $20
billion Arrow LNG project in Queensland, on Australia's east
The Arrow venture is the last of the four coal-seam gas to
LNG projects planned for Queensland and rising costs and
difficulties in securing adequate gas supplies may make it more
viable for Shell to scrap building its own plant and instead
sell gas to a rival operator in exchange for an equity holding
or offtake agreement.
SUPPLY GLUT, COSTS BLOWOUT
The reasons for the rise of cost-cutting and spending
controls follow two broad themes.
These are concern about over-investment leading to a glut of
supply just as China's economy matures and the developed world
struggles for growth momentum, as well as increasing labour
costs and taxes undermining the profitability of new ventures.
There was also the demand by investors for higher returns to
shareholders from resource companies, which generally used the
windfall profits from the boom years from about 2004-08 and
2009-11 to invest in boosting supply rather than dividends.
BHP Billiton, the world's biggest miner, has pledged to
increase returns to shareholders while cutting capital and
exploration spending to $18 billion in the current financial
year, down a fifth from the year before.
If the $4 billion in savings was added to the bottom line
for the year to June 2012, it would have boosted BHP's net
income 26 percent to $19.4 billion.
That's obviously too simplistic a view, but even those
figures gave an idea of the scale of what BHP is trying to do,
namely deliver a significant increase in cash available to
return to shareholders in an environment of declining prices for
many of its key commodities.
The jury still appears to be out on whether BHP, and indeed
other resource companies, will succeed in boosting returns
despite price pressures.
BHP has the biggest market capitalisation in the S&P ASX 200
index, the Australian benchmark, with the second spot
filled by Commonwealth Bank of Australia.
Since BHP's announcement on Aug. 22 last year that it was
entering a new era of austerity, its share price increased 3.7
percent to close at A$34.41 on May 17, while over the same
period Commonwealth Bank has jumped 32 percent to A$73.21.
And it's not just that Commonwealth Bank is an exceptional
performer, as the overall index has risen 18 percent, its gains
being held back by commodity companies like BHP.
Rio Tinto is up 2.2 percent since August last year, and
modest increases aren't only limited to Australian-based
Wilmar is up 6.9 percent, Exxon Mobil by 5 percent and Shell
by 0.4 percent, all of them underperforming their respective
But it could be worse, if London-listed Anglo American
is anything to go by. Its shares have declined almost 18
percent since August last year, and it also happens to be one of
the few major mining companies yet to announce a cost-cutting
and restructuring drive.
New Anglo American Chief Executive Mark Cutifani has
promised such a review by July, and it will interesting to see
if the company's share price can post gains, assuming the former
South African company also follows the cost-containment route.
If you believe that the resource companies will be able to
cut costs by more than commodity prices decline, and furthermore
will return capital to shareholders, then they are probably a
Currently, they may seem too risky compared to the higher
dividends already being offered elsewhere in the equity market.
Disclosure: At the time of publication Clyde Russell owned
shares in BHP Billiton, Rio Tinto and Commonwealth Bank as an
investor in a fund. He may also own other shares mentioned as an
investor in a fund.
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