BHP Billiton, Mitsubishi Layoffs Highlight Mining Industry Weakness

BHP Billiton, Mitsubishi Layoffs Highlight Mining Industry Weakness
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BHP Billiton Limited (NYSE:BHP) and Mitsubishi Corp (TYO:8058) are firing 230 workers from an Australian coal mine as dropping prices, global oversupply, and cooling Chinese demand force companies to reevaluate which of their mines are still viable, MarketWatch reports.

Layoffs meant to keep Saraji mine competitive

“A recent review of the Saraji mine by the company concluded that a fundamental improvement in the cost base of the open-cut operation is required to ensure that it remains competitive,” said BMA president Lucas Dow said in a statement. “BMA has made a number of changes across its operations to reduce costs and increase productivity to ensure that our operations are profitable and sustainable.”

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Management said that it is working with employees at the Saraji mine in Queensland to ensure that the mine stays competitive.

The joint venture, BHP Billiton Mitsubishi Alliance (BMA), operates numerous coal operations and is the largest exporter of steelmaking coal worldwide with about 10,000 staff and contractors working for them, so even if laying off a few hundred people doesn’t seem like big news, the inflection certainly is.

Previous investments based on higher prices, lower global production

Companies and ventures like BMA were investing heavily just a few years ago when China’s economy was still roaring and prices were relatively high. The contraction is a major change from where the industry saw itself when it was spending billions in capex, and it likely won’t be the last. As the price drops production centers that are relatively high on the cost curve will start burning cash, but if the gold sector is any guide this won’t force them to close down (at least not right away) since operating costs can be low relative to fixed costs, driving prices down even more.

The ban on new plants in some of China’s industrial centers, and regulations effectively banning new plants in the US, would help mines like Saraji that are on the cusp of profitability by preventing new plants from pushing it even further up the cost curve, but unless a production starts to fall or demand gets a very unexpected boost, it’s hard to see coal getting the level of price support it needs for all the investments from 2009-2010 to play out as hoped for.

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