Base metals miners continue to fight against inflationary pressures

The most recent financial results published by base metals mining companies highlight just how inflation is affecting profit margins, with increasing wages, financing costs and input prices all hitting profits, sources told Fastmarkets in the week to Thursday March 28

The trend is set to continue, sources said, with mining costs likely to remain inflated for the foreseeable future.

Inflation

High inflation has been an ongoing economic theme in Western economies since early in 2021.

Inflation, measured by the US consumer price index, has been above 3% since May 2021, peaking at 9% in July 2022.

Inflation’s impact on mining company profits has been notable, with various miners citing rising wages and energy costs as major factors affecting their margins.

Several mining companies used their year-end production and financial reports to highlight the challenges caused by high inflation.

In its full-year production report for 2023, published on February 1, 2024, Glencore said: “We expect to report higher copper, zinc and nickel FY 2023 unit costs than previous guidance, reflecting increased inflation across key operating regions.” 

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And Glencore is far from the only mining company to raise these concerns, with Anglo American, South 32 and Rio Tinto among the many mining companies to single out inflation as having a negative impact on margins. 

A range of companies have been highlighting how increasing input costs have been driving up unit costs, including Teck Resources, where copper unit costs have risen to $2.27 per pound, up 35% since 2019, while its zinc unit costs have reached $0.68 per pound, up by 33% in the same comparison.

The Canadian miner said in its fourth-quarter results for 2023, which it published on February 21, that higher wages and input costs were affecting operational expenditure.

“In line with the broader mining industry, we continue to face inflationary cost pressures across our business, which have increased our operating costs and capital expenditure compared to prior years,” Teck said in the report.

“Pressures on the cost of certain key supplies, including mining equipment, labor and contractors, as well as energy costs in Chile and changing diesel prices, are reflected in our capital expenditure and annual unit cost guidance for 2024,” the company added.

Other market participants highlighted similar concerns.

In financial results published on December 31, 2023, Anglo American said: “Group copper equivalent unit costs increased by 4% [due to] inflationary pressures, particularly labor and electricity/”

And the extended nature of the current bout of inflation has been particularly challenging for miners, according to  Daria Efanova, head of research at Sucden Financial.

“Inflation is elevated [and] the longevity of the inflation is causing problems,” she said. 

And several sources told Fastmarkets that inflation was undoubtedly having a big impact on miner profitability.

“Some mines are barely making a profit,” a zinc trader said, adding that inflation was a leading reason.

Other sources said they expect some of the inflationary factors to be locked in because increasing wages were here to stay.

“it is impossible to reduce wages [once] they go up,” a miner source said.

And a trader source said: “There has been a general increase in costs and interest rates, [so while] energy costs have come off a bit, everything else is still elevated.”

High financing costs have also been inflationary for miners, who told Fastmarkets that, in addition to adding to costs, the high cost of finance was reducing investment.

“Alongside higher financing costs, persistently high inflation and high labor costs remain a challenge,” Efanova said.

And Fastmarkets analyst Andrew Cole said that high financing costs would “eat into miners’ profits and will inflate capital costs for new projects, potentially delaying the development timelines for the next generation of mines.”

He said the high financing costs had a particular impact on metals where there was a supply deficit, such as copper.

“In under-supplied markets like copper concentrates, high costs are making tightness worse and extending [that] tightness into the future as capex for new capacity rises and forces investment delays,” Cole said.

Mining-specific inflation

Some mining companies are also facing mining-specific inflationary factors, such as declining ore grades.

“Grades are down in Europe, where many of the mines are old,” a second miner source told Fastmarkets. “Some mines need to reduce costs and to reduce staffing levels to keep going.”

Lower ore grades affect costs because mines need to process more material to produce the same amount of metal, thereby extending production times and increasing energy costs.

“It’s fair to say there have been some structural increases in costs,” Concord’s head of research, Duncan Hobbs, told Fastmarkets.

“Declining ore grades as well as higher input costs [are pushing up production costs],” Hobbs said.

And a third miner source said that because of falling ore grades, production costs would inevitably rise.

“If inflation was zero, our costs would still be going up,” the source said.

Hobbs added that costs do not only move in one direction, with some input costs, such as those for caustic soda, lower zinc and copper treatment charges (TCs) and recent energy price falls were providing some relief to miners.

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