Booming commodity prices led to announcements of sizable mineral investment projects in recent years. The commodity bust saw many immediate project cancellations. Rapid evaporation of billions of dollars of anticipated spending likely contributed to the economic downturn, and to the alarming drop in business confidence. But are all of the scuppered projects on indefinite hold?
Large-scale projects that were cancelled around the world are too many to number. Suffice it to say that there were enough of them that mineral commodity-watchers quickly projected an impending second rapid run-up in prices due to supply shortages, economic downturn notwith-standing. With its heavy mineral sector interests, Canada was not exempt. Cancellations hit the oil and gas industry, with the highest-profile cuts being multi-billion-dollar oilsands projects. Key investments in a number of base metal mines were also pulled in the past year.
At first glance, plunging selling prices seem reason enough to pull the plug. But that argument only works if the projects in question needed sky-high prices to justify them. For some projects, this appeared to be the case. But for most, projects were designed to make money at much lower prices than last year’s peaks. If so, then why the headline-grabbing cancellations?
Actually, plunging prices are in fact the answer – with a twist. Input costs for these huge projects also went into freefall. Everything from steel to copper and other base metals, fuel, building materials, to machinery and equipment has seen price compression in the past year. Declines have been well into the double digits, and as such, have a marked impact on the bottom line.
Even labour, in extremely tight supply less than a year ago, is also more plentiful, and although wages do not tend to fall, increases are more muted. Project planners that inked contracts at last year’s frenzied world prices can easily realize savings on the cost of a wide range of inputs at today’s prices – savings that are substantial enough to lure dealmakers back to the table.
How so? The dramatic drop in selling prices late last year raised serious questions about the viability of projects, even those with very conservative assumptions. World selling prices for oil, gas, and base metals remain low, but have rebounded enough to make many projects work. On the cost front, projects are now viable at much lower levels than were conceivable last year.
This sounds nice in theory, but are projects actually resurfacing? They are, and not just small ones. Cancellation of the $14.8 billion Fort Hills oilsands project sent shock waves through Western Canada last year, and preceded thousands of oil patch layoffs as other projects were delayed or cancelled. But just weeks ago, talk of restarting discussion surfaced, along with speculation that at today’s prices, the final tab could well be less than $10 billion. Just days ago, the $800 million Kearl oilsands project was given the green light. These are just two projects, but significant ones, and a sign of a trend that seems likely to continue and grow.
The bottom line? Low prices nixed key projects, but ironically are bringing them back to the table. Together with new global infrastructure plays, these will give a good boost to near term growth.