By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The super cycle is turning and miners’ super returns are under threat. But they can probably avoid another period of value destruction like the one that preceded the decade-long materials boom.

The problem is slowing demand in China, which is expected to account for the bulk of demand growth for copper and iron ore this year. Chinese housing starts fell sharply year-on-year in April. Industrial production, domestic retail sales and exports also looked weak.

With production costs increasing at an annual double-digit pace, miners need prices to stay high if their egregious profitability is to be sustained. The likes of Rio Tinto, BHP and Anglo American enjoyed operating margins of 30-40 percent last year, on a par with Google. Margins in iron ore, which accounted for the bulk of the five biggest miner’s 2011 profits, were roughly double that, according to Rio.

Miners’ average return on capital was 19 percent in January, according to data from Aswath Damodaran at New York University. The industry’s average cost of capital in 10 percent. Fast back to 2000, before the China boom kicked off, and returns were at 6 percent.

Could single-digit returns become the new norm? Probably not. China’s appetite for raw materials is softening not ending, and momentum would pick up if Beijing eased off the monetary brakes. Fading demand for steel in construction should be partly offset as newly affluent Chinese urban-dwellers buy more appliances and cars. And after steel intensity peaks, later-cycle commodities like potash (used in fertiliser) and diamonds tend to pick up. Moreover, the western miners are generally the lowest-cost producers, so have a competitive advantage in a downturn, especially versus Chinese rivals.

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Commodity traders are finding it harder to maintain their privacy. Louis Dreyfus is the latest to step out of the shadows. The venerable agricultural trader needs to invest if it wants to stay relevant in a consolidating and increasingly capital-intensive industry. But a float or merger would dilute family control. For now, plans to tap debt markets mark a sensible compromise.

Dreyfus made a net profit of $735 million on revenue of about $60 billion last year, according to the Financial Times, making it the world number three. Expansion must be funded internally or via bank financing, although Dreyfus also raised $2 billion from the sale of a natural gas pipeline and storage business last year.

New sources of funding may be needed if Dreyfus is to maintain its edge. Asia’s growing appetite for grains has lured rival commodity traders into agriculture. Half a decade of high prices and a scarcity of targets have pushed up acquisitions prices. Peers are investing in strategic assets, like silos and ports, and value-added activities, such as food processing, to gain competitive advantage.

True, Dreyfus already enjoys scale. But to keep up, it reckons it needs to invest $7 billion over the next four years – 40 percent more than in the previous four. Rivals are moving even faster. Glencore, the Swiss trader, raised $8 billion in a float last year and recently agreed to pay more than $7 billion including debt for Canadian wheat trader Viterra. Japan’s Marubeni is reportedly eyeing an acquisition of U.S. grain trader Gavilon for $5.2 billion.

Moreover, Margarita Louis-Dreyfus, who became the trustee of a controlling stake in the company after her husband’s death in 2009, needs to be prepared for a curve ball from minority shareholders. Other family members with 35 percent of the business hold options that could require Dreyfus to buy their shares.

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It’s easy to see the temptation to pile into mining industry bellwethers BHP Billiton and Rio Tinto after the sector’s recent pummelling. The miners’ valuations looked depressed even before the market’s recent Greece-related sell-off. After a near-15 percent slide since May 1, the companies’ shares are trading close to forward enterprise multiples last seen during the dark days of 2008-2009. But any rally could be a way off.

Valuations may be flagging, but they’re still double the lows they hit after Lehman went down. And even if Europe manages to muddle through, miners have plenty else to worry about. BHP chairman Jacques Nasser on May 16 became the latest top mining executive to sound a cautious note on demand for raw materials. China’s April trade figures showed sputtering demand for iron ore, steel and copper. Add worries about the staying power of the decade-long commodities “super-cycle” to the sector’s rampant cost inflation, and red-hot margins – running at close to 50 percent for some miners last year – look vulnerable.

Worried that miners might destroy value if they press on with some of their more ambitious growth projects, analysts have been calling for more share buybacks. But investors hoping for a payout bonanza shouldn’t hold their breath. Rio last week brushed off calls to return more cash; BHP has said it will “sequence” new investments to match cash flows.

It would take a deeper, more sustained fall in commodity prices to convince Rio and BHP to abandon an estimated $50 billion worth of new projects expected to be approved over the next nine months, say analysts at Credit Suisse. The likelihood is that BHP and Rio will still spend a combined $27 billion on growth projects this year, more than half of their forecast 2012 operating cash flow.

Management may be right to take the long view. But that may not sit well with shareholders who want jam today. Low valuations may endure for a while yet.

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Gold has a dual personality. Many think it is the ultimate hard currency. Others like it because it looks pretty. And while its price climbed high as investors have sought shelter from the financial crisis, gold has behaved more like a risk asset recently.

Despite the fresh mess in the euro zone, gold dropped to a four-month low, below $1,600 an ounce. Scared investors are moving into dollars, Treasuries and Bunds. But not gold. With the greenback’s rise against the euro keeping gold bugs on the sidelines, it may fall to physical buyers to put a floor under the price. But jewellers and other buyers who like gold “because it’s pretty” are feeling the pinch too. Especially in India and China, the world’s biggest consumers of the metal.

Political upheavals in Greece and fresh pressure on Spanish banks have pushed euro zone policymakers back into crisis mode. In recent years that sort of pressure has been positive for gold, but this time there is little evidence that it’s led to an uptick of fear-driven buying.

Asian buyers may be attracted by the lower prices. Shanghai trading picked up as the price fell below $1,600. Gold demand in India was twice the usual daily average on May 9, according to UBS. But that was helped by the lifting of a controversial excise tax on precious trinkets and the Indian government’s attempt to shore up the rupee.

More aggressive physical buying may eventually put a floor under prices. But gold’s 18 percent slide from its September 2011 peak of $1,920 an ounce needs to be seen in proper context. Years of elevated gold prices have pushed jewellery demand down by a quarter over the past decade. The metal still trades at more than double what it cost before the financial crisis kicked into high gear in 2008.

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Shady corporation sends robot army into space to mine precious metals from asteroids. That’s the basic setup of Blade Runner, the sci-fi epic that hit cinemas 30 years ago this June. It’s also the business plan for Planetary Resources, a U.S. startup that has outlined its strategy to take the mining industry into near-Earth orbit. The economics look challenging, to say the least. But the idea is not completely bonkers.

The hitherto publicity-shy company’s backers, including Google billionaire Larry Page and Titanic director James Cameron, are hardly the first eccentric technologists to cotton onto the idea. Mining from asteroids has been a staple of futurist thinking since the Russian rocket pioneer Konstantin Eduardovich Tsiolkovsky first proposed it in the early 1900s.

Fast-forward a century and high commodity prices, a mini-boom in private space flight and miners’ soaring labor and energy costs have combined to reinvigorate interest in tapping the vast resources of outer space. The cost of mining platinum on earth is rising at 16 to 20 percent per year. Anglo American, the world’s biggest platinum producer, estimates that about half the world’s production is unprofitable at today’s price of about $1,500 per ounce.

Assuming they could be economically put into orbit, space-faring robots equipped with solar panels or small nuclear power plants would be largely immune to such cost pressures – and wouldn’t go on strike, either. Peter Diamandis, Planetary Resources’ co-founder, estimates a single asteroid 30 meters in diameter could contain up to $50 billion worth of platinum. There are thought to be hundreds of thousands of such objects within relatively easy reach of Earth.

Launch and recovery costs may be bigger hurdles to a vibrant asteroid mining industry. Planetary Resources says its top priority will be to develop cheaper launch technologies. Yet even if it could land a robot miner on an orbiting rock for a fraction of the current $50 million to $500 million price tag of modern space missions, getting mined material safely back down could prove excessively costly.

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The British government may have warmed to fracking. But while shale-gas extraction has put America on the road to energy self-sufficiency, it may be premature to bank on a similar boom in the UK. The country’s shale formations could be enough to meet decades of demand if bullish interpretations of geological data are right. But economics may keep much of the shale bounty under ground.

Tapping onshore shale fields might seem straightforward. Today’s import prices mean UK drillers would only have to be about half as efficient as their U.S. counterparts for onshore shale to be competitive with liquefied natural gas from abroad. But UK shale exploration is still embryonic. Britain’s small land area and dense population could complicate matters. Lancashire, where UK driller Cuadrilla says it has found about 200 trillion cubic feet of gas, counts more than 1,220 people per square mile, compared with less than 10 per square mile in shale-rich North Dakota.

Offshore reserves are likely to be five times whatever lies onshore, according to the British Geological Survey. That’s prompted talk of the UK sitting on 1,000 trillion cubic feet of gas. But offshore fracking has yet to be pioneered. The UK industry’s vast experience in the North Sea might help in developing the technique. Still, experts say it could take gas prices of up to $200 per barrel of oil equivalent to make it commercially viable. Today’s UK liquid natural gas imports go for $50/boe. And global LNG prices look set to fall as the United State begins large-scale exports from 2015.

U.S. drillers have made huge strides in efficiency, with some producers drilling wells twice as fast as they were just two years ago, according to energy consultants Navigant. Costs won’t fall forever. Some combination of tighter environmental controls, equipment shortages and rising labour costs is bound to bite eventually – just as it has in conventional petroleum production.

Given these pressures, it’s not immediately clear how UK shale could compete with LNG imports over anything but the very long term. It looks more like an insurance policy against a dystopian future of $200 oil.

By Kevin Allison and Christopher Swann

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Higher oil prices are yet another force pushing the euro area’s economies apart. They hit gross domestic product three times harder in Greece than in Germany, according to data from Moody’s Analytics. Ireland and Italy are big losers, too. With Iran worries driving prices higher and sovereign debt fears flaring up again, governments may be even more tempted to tap strategic petroleum reserves. But that won’t guarantee lower prices.

The price of crude has been among the best predictors of global recessions, preceding downturns in each of the past four decades. In the euro area, the pain is not spread evenly. While a $10 increase in the price of a barrel of oil subtracts just 0.28 percentage points from German growth a year later, the damage to Ireland and Italy is twice as large, according to Moody’s.

Hapless Greece, which imports four times as much oil per unit of GDP than France, suffers most of all with a 0.8 percentage point slowdown in growth. The effect is magnified in sunny countries, since tourism suffers when petrol or jet fuel prices rise.

For crisis-hit countries already grappling with austerity, higher oil prices could complicate efforts to grow out from under onerous debt loads. This may affect policies concerning strategic or emergency reserves. So far France is the only euro zone country to explicitly state that it may join the United States and UK in tapping spare supplies. But with rising Spanish bond yields already thrusting Europe back into crisis mode, other vulnerable countries might be tempted to go along.

The problem is that there is no guarantee that would drive prices down. Europe’s reserves are mostly refined products, not crude. And Germany, home to Europe’s biggest stockpile, remains opposed to tapping its supplies. Even if it could be convinced, any deterioration in the geopolitical standoff over Iran’s nuclear programme could just as easily send oil prices higher, regardless.

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Nigerian billionaire Aliko Dangote is seeking a London listing for his $11 billion cement company. It is a watershed moment for Nigeria, and for Africa. There are significant governance hurdles, and Dangote’s plan to build a pan-African aggregates champion isn’t without risks. But the prospect of a FTSE 100-sized Nigerian company is worth celebrating.

Several years of strong economic growth, powered by the commodities super-cycle, have renewed investors’ interest in the world’s poorest continent. Africa has seen false starts before, but the rise of China, which has been investing heavily in the region, raises hope that Africa’s economic development might be getting some heft.

For investors, it is not easy getting focused exposure to sub-Saharan Africa. The usual suspects, miners like Anglo American and Lonmin, the insurer Old Mutual and brewing giant SABMiller – either have footprints that extend well beyond their home turf or have share prices that depend more on China’s economic growth than Africa’s. Zambeef, the AIM-listed Zambian beef producer, and Lonrho, the recently revived rump of Tiny Rowland’s century-old African conglomerate, offer direct plays on the continent. But they weigh in at less than 2 percent of Dangote Cement’s expected market cap.

While Nigeria has a poor reputation, Dangote is a company which could find good investment demand. It would easily be big enough to qualify to membership of the FTSE 100, though it remains to be seen whether it will comply with all of London’s index-inclusion criteria.

After recent debacles at the likes of ENRC and Bumi, corporate governance will be a red-hot topic. Aliko Dangote has said he would step down as chairman, however. The company is also likely to try to recruit experienced UK or European directors to supplement its largely home-grown board, which is well-regarded in Nigeria but less well known elsewhere.

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Two years after BP’s disaster in the Gulf of Mexico, the UK oil major has yet to convince investors it is undergoing the radical corporate change it promised to achieve. There is no sugar-coating the financial, human and environmental toll of Macondo. But the catastrophe prompted a needed bout of soul-searching and some long-overdue restructuring at the company. A new strategy emerged – to shed stodgy, mature assets and create a smaller, higher-returning company focused on its core competence in exploration. That was the right response. Still, BP’s road to renewal is proving a long one.

BP has made some positive strides. The third quarter of 2011 appears to have marked the peak of spill-related operational disruption. The dividend was resumed, albeit at about half of its pre-Macondo level, and subsequently raised 14 percent. The recent settlement with plaintiffs’ lawyers ahead of a Louisiana civil trial suggests that the risk of severe legal fines and penalties, while not yet gone, is at least fading.

Still, re-engineering BP’s portfolio is proving a challenge. An initial flurry of asset sales to pay for the cost of the spill has given way to more halting progress on disposals. BP has jettisoned some mature fields in the United States and the UK, and exited non-core countries like Colombia, Vietnam and Pakistan. But a $7 billion deal to sell Argentina’s Pan American Energy to China’s Bridas collapsed last autumn. BP has yet to find a buyer for its lower-returning U.S. refineries, including the Texas City facility where an explosion killed 15 workers in 2005. A self-imposed deadline to sell by the end of 2012 reflects the bleak outlook for refiners generally.

Upstream, BP remains a major player in the Gulf of Mexico, and has entered the deep waters off the coasts of Angola and Brazil. There’s also a deal to develop a new gas field in India. But last year’s botched share swap and exploration venture with Rosneft in the Russian Arctic was a huge waste of management time.

Big oil companies don’t turn on a dime. Chief Executive Bob Dudley is still focused on 2014, targeting a 50 percent jump in operating cash flow from last year’s $22 billion as higher-margin projects ramp up. But investors can expect only flattish production growth this year. Dudley will have to hope investors keep the faith.