Rising oil prices threaten to erode mining sector's profitability

(Reuters) - Rising oil prices are the latest challenge to the mining sector’s profitability, threatening to eclipse hard-fought efficiency gains during the past two years and increasing metals demand.

Miners use heavy fuel oil to generate electricity at remote sites; they also use it for transport, with large trucks and other equipment guzzling down millions of gallons each day across industry.

Brent crude prices are up 40 percent in the past year, cheering oil industry executives but causing concern among their customers in the mining sector.

The concern is especially acute for underground miners, with power and labour costs about two-thirds of their expenses.

“Let’s be clear: Inflation is going to hit – is hitting all communities and all players across the industry,” Rio Tinto Chief Executive Jean-Sébastien Jacques told investors earlier this week after the company’s profit for the first half of the year missed estimates.

The oil price rally comes after mining companies spent the last two years striving for efficiency to revive balance sheets following the 2015-16 commodity price crash. The worry is rising energy prices could offset those efficiency gains.

Rio Tinto said in its half-year results that inflation was a growing concern, flagging cost increases for contractors, energy prices, and inputs at its aluminium division such as pitch and coke.

Glencore Plc CEO Ivan Glasenberg in February flagged “emerging inflationary pressures,” but then said the company could offset them through sales of expensive byproducts, such as cobalt. But cobalt prices have fallen roughly 30 percent on demand concerns, further challenging the industry.

Other metals prices have also weakened as well, with gold down 6 percent in the last year, copper down 3 percent and silver down 8 percent.

The miners are all insisting financial discipline will keep them resilient despite inflation.

Anglo American Plc in July said it was going ahead with a new copper project in Peru. The company has curbed costs by selling a bigger stake to its Japanese partner Mitsubishi Corp.

“We’ve seen increased energy prices, particularly, in South Africa and that can reflect itself either in electricity prices or in infrastructure charges if those things also use energy,” Stephen Pearce, Anglo American’s finance director, told investors last month after the company’s profit for the first half of the year met expectations.

Glencore is slated to post results for the first half of the year next Wednesday, with BHP Billiton scheduled to report later this month.

Reporting by Barbara Lewis, Melanie Burton, Susan Taylor and Ernest Scheyder; Writing by Ernest Scheyder; Editing by Richard Chang