Two years ago, Daniel Nilsson’s family bought a hotel in the town of Pajala, Sweden, some 50 miles above the Arctic Circle. The nearby Kaunisvaara iron-ore mine had just started production, and the Nilssons installed new meeting facilities and revamped the nightclub. “We wanted to give the locals and the people working in the mines a great hotel to come to,“ said Mr. Nilsson, its 28-year-old manager. “That’s why we bought it–we saw a future for it.“
But the price of iron ore sank last year, and with it the Lapland River Hotel’s fortunes. In October, the mine’s owner, Northland Resources, stopped operations. Two months later, Northland filed for bankruptcy.
“I think we lost 75% of our business,“ Mr. Nilsson said. “At the time, we thought it was unimaginable. But most of it was just gone overnight.“
Years of high commodity prices fueled a boom in investment around the globe by companies extracting resources–and by the many others, big and small, that depend on them.The ensuing slump has been devastating.
The mine and its servicing companies employed roughly 700 people in a town of 6,000, according to Andreas Lind, acting governor of surrounding Norrbotten County. Northland declined to comment.
Pajala isn’t alone. Commodities markets from oil to coal to sugar took a beating last year, with many prices falling to multiyear lows. The turmoil has led to job cuts, mine closures and losses for investors. It has spread to suppliers and contractors far bigger than the Lapland River Hotel: U.S. Steel Corp. said last week it would idle a plant in Ohio that makes steel pipes for the oil industry, laying off more than 600 workers.
Huge levels of output helped drive commodity prices down, and many analysts believe they will stay low: Large stockpiles remain, and some producers are carrying on despite lower prices.
China, for instance, had wheat stockpiles of 63 million metric tons at the end of last year, up from 46 million in 2008, according to U.S. Department of Agriculture data. It added 87 million barrels of oil to its stockpiles last year, according to Amrita Sen, chief oil analyst at consultancy Energy Aspects.
“Supply has been outstripping demand not because demand has been particularly weak, but because there was too much supply,“ said Stephen Briggs, commodities analyst at BNP Paribas SA. “It looks like this won’t change anytime soon.“
Take copper. The worst performer among base metals last year, it has shed 14% of its value on the back more than four straight years of oversupply.
Yet, new mines, including the Sierra Gorda mine in Chile that was inaugurated in October, continue adding to the glut. The Constancia mine, set to begin operations in Peru next year, looks to add even more.
In the sugar market, four straight years of global oversupply pushed sugar prices to multiyear lows last year.
“In October, prices were heading down, but the market thought we were approaching the bottom. Instead, the market saw a brief rally, and then it collapsed,“ said Matt Bradbard, who manages $300 million at Chicago-based RCM Asset Management. “We were working a trade back then and lost some money as a result from a position we were holding.“
But despite the price collapse, some sugar producers are adding capacity–the result of capital investments planned years ago. Iraqbased Etihad Sugar Co. is building a 900,000-ton refinery south of Baghdad that is due to come on line this year.
Producers of many commodities are hurting, and some are cutting back. Jerzy Podsiadlo, chairman of Poland’s Weglokoks SA–one of the largest exporters of hard coal in Europe–said his company expected to export 2.6 million fewer tons of coal in 2014 than the previous year, a drop of almost one-third.
“It is obvious that nobody in Poland is happy about the current low level of coal prices,“ Mr. Podsiadlo said. Thursday, Poland’s government said it would close four state-owned mines despite heavy labor-union protests.
Australian miner Fortescue Metals Group Ltd. had a capital-expenditure budget of $1.3 billion for the 2015 fiscal year. In November, it cut it in half. “We deferred some investments, as we felt that it wasn’t prudent to expand production at today’s prices,“ said Chief Executive Nev Power, in an interview. Australia is one of the world’s biggest suppliers of iron ore. Prices of the ore fell 50% last year.
Ivan Glasenberg, chief executive of mining giant Glencore PLC, recently criticized mining rivals for continuing to invest in and ramp up iron-ore production despite the rout in prices.
Speaking at an investor event in December, he said that “capital misallocation, not a lack of demand, remains a key issue for the sector.“
In Pajala, where tourists sometimes venture to see the Northern Lights in winter and the midnight sun in summer, the reckoning has been swift. Young people had been leaving the town in droves for decades before the mine opened.
“Pajala has experienced the wonderful aspects of a flourishing community as well as the brutal truth of what a bankrupt mining company really can set in motion–in a very short period,“ said Mr. Nilsson, the hotel owner.
–Sarah Kent and Patryk Wasilewski contributed to this article.
Source: AWSJ, Jan 12th 2015