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World mining outlook grim...

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Short-term prospects for global mining companies are bleak, as rising costs eat into profit margins already depressed by the recession, according to a report by PricewaterhouseCoopers (PwC).

"There is no doubt that the industry is facing a tough road ahead," said Steve Ralbovsky, the professional services firm's U.S. mining industry expert.

"Reducing capital and operating expenditures and managing production levels to ensure they operate at the lowest possible cost will be crucial for mining companies.

"However, given the long-term nature of mining projects and associated capital commitments, it may be difficult for companies to drastically reduce costs in the short-term," Ralbovsky said...
** one of the major reasons why GM went to the wall was because of its high cost, deal it has done with the union back in the 60s. Now that it has reborn as a new entity, I am not sure how many of the old employees are still working for the company. ??

May be there is a moral in the GM's story for the mining companies and the mining unions over here? It's better to compromise than going for broke?

Sometimes taking a step backward could mean a much wider sky and a much deeper ocean for the warring parties. Instead of a deadlock, it's become a whole new ball game with the prospect of a win-win outcome than a complete LOSE-LOSE failure.

The iron ore negotiation is in such a situation - without the long term contract with the Chinese, it will be very difficult for RIO to plan, budget and operate efficiently. Without a certainty in cash flow and with a large debt, I don't think it is a desirable position to be in. A complete breakdown in the contractual dealing would mean exactly that. To make it worse, with every supplier start selling into the spot market - just imagine what it will do to the spot price?

Unless they can hold back, but for how long? The Chinese has been spending big in the last few months stocking up preparing for this moment... can the suppliers outlast the Chinese reserves?

According to the latest news, the Chinese are compromising - they are now demanding a 33-40% cut instead of the 40-45%, I reckon it's about time someone start sitting down and reappraise the whole mess and start working out a win-win solution instead of holding fast for a disaster.

In any case, if this PWC report and the expert knows what he is talking about, here's a question - why the heck investors in ASX are still this gung ho about all these miners? In a separate report, Morgan Stanley was saying they are expecting a 12% cut in mining capex this year. This seems to rhyme with the PWC report...

Personally, I have a projection on the XMJ index (and some of its component stocks), it is pointing to a possible 18-20% drop from the current level. Not sure if anyone cares, but I reckon it will be fun to watch when it happens. Let's wait.

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