Delays to mining projects in Western Australia could push commodity prices higher and exacerbate shortages.
3 min
SYDNEY—Rio Tinto PLC’s destruction of two ancient caves in Australia to expand an iron-ore mine could have ramifications for global commodity markets if local lawmakers intensify scrutiny of mining activities that threaten heritage sites.
Among the most controversial recommendations made by a federal-government inquiry into the destruction of the rock shelters at Juukan Gorge in Western Australia in May is a moratorium on expansions of existing mines or new pits that encroach on sites of cultural or historical significance. Even if lawmakers opt for a less hard-line approach, experts warn of potential delays to production and higher costs that could affect supply of key raw materials such as iron ore, used to make steel.
None of the recommendations handed down by the inquiry in its interim report on Wednesday are binding, but miners risk inflaming tensions with some investors who feel the industry needs to show greater sensitivity to environmental and cultural issues if they don’t accept them. They also face sensitive negotiations with indigenous groups that are the traditional owners of the land.
Metals prices have been rallying as China’s economy bounces back strongly and other major markets recover from the coronavirus crisis. Copper prices have risen to their highest level in almost eight years. Iron ore is one of the best-performing assets this year, fetching $150.75 a metric ton on Wednesday, its highest price since early 2013.
China’s unexpectedly strong appetite for these commodities has raised concerns over whether there’s enough supply, with many analysts predicting market deficits for iron ore and copper through at least the middle of next year.
Delays to mining projects in Western Australia, where companies dig up metals including copper and gold, could push commodity prices higher and exacerbate shortages already worsened by pandemic-driven disruptions to operations elsewhere. Iron ore is considered to be most at risk because Australia accounts for more than half of the world’s trade in the commodity by sea.
“This could be a watershed moment for the Western Australia mining industry and could impact Western Australia iron-ore production, and possibly other commodities, in 2021 and beyond,” Goldman Sachs said.
Already there are tensions between miners and some investors following the report into the loss of the Juukan caves, which contained a trove of artifacts that indicated they had been occupied by humans more than 46,000 years ago.
Fortescue Metals Ltd., the world’s fourth-largest iron-ore exporter by volume, rejected the idea of a voluntary moratorium on new heritage consents. “We do not believe that this is either a feasible or practical solution,” Elizabeth Gaines, Fortescue’s chief executive, said.
Fortescue said it had worked with indigenous groups to protect and avoid nearly 6,000 heritage sites threatened by its mining activities.
Miners must balance the need to replace the ore that they unearth with respecting the interests of indigenous groups. Fortescue pointed out that the iron-ore industry has been a pillar of Australia’s economy as it emerges from a first recession in 29 years.
“A moratorium would unnecessarily stall mining, infrastructure and other activities for an unknown and possibly extended period,” said Tania Constable, chief executive of Minerals Council of Australia, an industry group.
Still, many investors feel the industry needs to do more, and have pushed for leadership changes when standards fall short. Rio Tinto Chief Executive Jean-Sébastien Jacques and two other executives were ousted after several investors criticized the company’s initial response to the caves’ destruction because no one had been held accountable.
Hesta, an Australian pension fund for health-care workers, said it strongly supports the recommendation that companies with existing heritage approvals, known as Section 18 permissions, suspend related works until they can verify consent by traditional landowners.
“The inescapable findings of the inquiry are that Aboriginal heritage sites remain vulnerable to destruction,” said Debby Blakey, Hesta’s chief executive. “It would be unacceptable to investors that boards of mining companies are not actively and transparently seeking to understand their exposure to this risk.”
Kim Christie, an iron-ore analyst at Wood Mackenzie, said a near-term squeeze on commodities supply from Australia isn’t likely. The final report from the inquiry won’t be finalized until next year. Still, there is a risk of higher mining costs and delays to expansions or new mines later as miners sharpen their focus on heritage issues and consultation with traditional owners, she said.
“Certainly moving forward if there is going to be that greater level of tightness [in supply] it could support prices higher than we otherwise would have thought,” Ms Christie said.
Scrutiny will especially fall on Rio Tinto. A moratorium on new heritage consents could affect up to 12 projects that Rio Tinto has planned over the next five or so years to maintain its iron-ore production at current rates, Goldman Sachs said. That means there is a risk that Rio Tinto won’t ship 327 million tons of iron ore next year as the bank had earlier forecast.
Rio Tinto said it is reassessing its mining operations in places with identified heritage sites that could be affected over the coming two years.
“I think Rio Tinto would rather forgo a few tons than their reputation,” said Ms Christie, of Wood Mackenzie.
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2 min
Tuesday’s retail sales report could be the scrap of evidence that tips the balance as Federal Reserve officials decide how much to cut interest rates on Wednesday.
It is practically a given that the central bank will reduce rates. Inflation has fallen to its lowest point since February 2021, giving the Fed more flexibility to focus on the second component of its dual mandate—achieving maximum employment. Although the labor market remains resilient, the most recent two jobs reports have been weaker than expected, putting some pressure on the Fed to loosen monetary policy.
The question now is by how much rates will fall—0.5 percentage point, or 0.25 point? The indications from interest-rate futures are split , recently favoring the more aggressive half-percentage-point decrease.
Andrew Hollenhorst, an economist at Citi , leans toward the likelihood the Fed is more cautious on Wednesday, cutting rates by 0.25 percentage points. But he notes that it it is a close call that depends on the dynamics of the bank’s rate-setting committee and the strength or weakness of Tuesday’s retail sales report.
A positive surprise would suggest that both consumers and the labor market remain resilient, paving the way for a more modest cut. If the report comes in well below expectations, however, Fed officials may grow concerned that a weaker labor market is weighing on consumer spending, which could lead to a bigger cut, Hollenhorst added.
Louis Navellier, founder and chief investment officer of the money-management firm Navellier agrees. “In theory, if the August retail sales report is horrible, then a 0.5% Fed key interest rate cut may be forthcoming on Wednesday,” he said.
Economists are expecting retail sales will decline by 0.2% in August from July, according to FactSet. They jumped by a surprising 1% in July .
Lower gasoline prices and car sales will likely drag the headline number lower. Indeed, stripping out car and gas sales, retail sales are projected to increase by about 0.3% month over month.
Yet there is growing concern that even excluding autos and gas sales, the sales figure will be soft. While spending was remarkably strong in July, the Fed’s latest Beige Book flagged that consumer spending ticked down in August, points out Bill Adams, chief economist for Comerica Bank . Many retailers, particularly those catering to lower-income shoppers, have warned that Americans are being cautious and exceedingly choosy about what they are buying and where.
The impact of the retail sales report will likely extend beyond the immediate rate cut. The insights it contains about U.S. consumers will also factor into the Fed’s quarterly update to its Summary of Economic Projections, containing officials’ latest forecasts for the U.S. economy, inflation, and near-term interest rates.
The so-called dot plot , which charts the individual interest-rate projections of the seven members of the Fed’s board of governors and the 12 regional Fed presidents, is always closely watched as investors try to chart the Fed’s future actions.
Hollenhorst believes the median dot showing where rates will be at the end of 2024 should show “at least” 0.75 percentage-point of cuts, factoring in 0.25 point at each meeting through the end of the year. But it is likely that officials will leave the door open for more cuts in case data on the job market or consumer spending sour faster than expected.
