LAUNCESTON, Australia, Jan 28 (Reuters) – The plunge in oil prices is a double-edged sword for many miners, lowering the cost of production but at the same time cutting the value of the commodities they produce.
At first glance the 57 percent tumble in Brent crude since June last year would seem to be an unambiguous positive for many commodity producers, given their heavy reliance on diesel to operate mines and transport output to ports.
This is especially the case for Australian coal and iron ore mines, which use diesel not only for mining vehicles but to generate electricity as well, given their remote locations.
Diesel-fired train locomotives help miners move their commodities across hundreds of kilometres (miles) and there may even be savings on charter flights used to ferry workers to and from remote mine sites, given the lower cost of aviation fuel.
Research by Morgan Stanley, published on Jan. 25, said that oil and diesel made up between 9 and 12 percent of the total production costs for bulk commodities such as coal, iron ore and bauxite, but only 3 to 5 percent for metals.
The major impact of the declining oil price is to shift the production cost curve lower, effectively meaning more mines will be profitable, even at the current low commodity prices.
The spot price of iron ore in Asia .IO62-CNI=SI dropped to a 5-1/2-year low of $62.80 a tonne on Tuesday, and is down 67 percent from its peak of $191.90 reached in February 2011.
Spot thermal coal from Australia’s Newcastle port , an Asian benchmark, was at $61.97 a tonne in the week ended Jan. 23, close to a six-year low and 54 percent below its post-2008 recession peak of $136.30 in January 2011.
The question is whether costs have fallen enough to offset lower commodity prices, and the answer is no.
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