A rout in pricing for metals and bulk commodities has miners on the defensive against persistent inflation weighing on operating costs and pinching margins.

In recent months, prices for a wide range of metals and mining products, including coal and iron ore, have plummeted as fears of a recession mount. Absent a reprieve on costs, metals price pain has started to bite into second-quarter profits and is hanging over earnings expectations for the rest of the year.

Amid the sudden shift in commodity prices, analysts and executives flagged measures to cut costs. Whether producers take action still depends on how far prices fall and how long they remain down.

"The upcoming theme in this quarter, and especially going into [third-quarter] results, will be on pumping the brakes on spending where you can," said Cormark Securities mining analyst Stefan Ioannou. "The timeline on building things may get pushed out a bit."

Metals prices are historically high, and major producers are not yet hitting the panic button. That would take significantly lower prices. But costs have risen along with price gains, making recent downward movements in pricing a greater concern for higher-cost producers.

"Not that many years ago, a high-cost copper producer was producing for $2 a pound, maybe 2.25/lb," Ioannou said, noting it would have made decent profits with copper trading in the low $3/lb range, where prices sit again today. "Now they're producing it for $3/lb, maybe $3.25/lb. So margins for higher-cost producers are getting sandwiched, and that's something to watch."

Until recent quarters, miners had benefited from strong price increases across many metals as countries emerged from the worst economic impacts of the COVID-19 pandemic. The average quarterly copper price fell 1.6% year over year in the second quarter, in marked contrast to previous quarters, according to S&P Global Market Intelligence data. In the first quarter of 2022, the average copper price was up 17.5% year over year, while quarterly average copper prices did even better through 2021, increasing by 51.5%, 80.7%, 43.6% and 35.0%, respectively, in the first to fourth quarters.

For copper, the downward trend worsened in the initial weeks of the third quarter, with prices down 20.1% against the third quarter of 2021. Though only based on partial data, the sudden shift in sentiment has caught the industry by surprise and spurred talk of potential cost cuts.

"It's just striking how quickly and dramatically markets changed in the second quarter," Richard Adkerson, Freeport-McMoRan Inc. chair and CEO, said on a July 21 earnings call. "Prior to this call ... optimism was widespread. Copper prices approached $5 [per pound]; many were expecting it to go higher. We used $4.50/lb in our outlook. And now we have prices just above $3.25/lb."

A similar scenario has unfolded for other base metals such as nickel, zinc and aluminum. After strong year-over-year increases in average quarterly prices through 2021 and into 2022, aluminum prices were only up 20.3% in the second quarter and are down 9.9% in the first few weeks of the third quarter so far on a year-over-year basis. Likewise, declines in average quarterly iron ore prices have accelerated in 2022. Prices were down 35.5% year over year in the first few weeks of the third quarter after dropping 27.8% in the second quarter.

Cost-cutting talk

So far, the quick reversal in metal price fortunes has not led to major cost-cutting announcements. The sector as a whole is in a relatively strong position to weather downturns, partly because of its focus on cost-cutting and debt repayment, according to analysts and mining management.

"In the last cycle, a lot of miners were caught offside from a balance sheet point of view, and that really forced them to shore up their balance sheets. That's going to pay dividends now," Ioannou said. "I don't think we're going to start to see the concerns regarding bankruptcies come up anytime soon, whereas that was a big topic in 2015. We're not there yet."

Metal producers took a similar stance on recent earnings calls as they reflected on past downturns. Still, the hefty metal price pullback has been spurring contingency planning.

Freeport-McMoRan plans to "review opportunities to defer spending" amid lower metal pricing, President Kathleen Quirk said on a July 21 earnings call. In the second quarter, the Phoenix-based copper-gold miner's earnings dropped to $840 million from $1.08 billion year over year, while revenue decreased to $5.42 billion from $5.75 billion.

In a similar vein, Pittsburgh-based aluminum producer Alcoa Corp. management said on a July 20 earnings call that the company's production costs have improved relative to the rest of the aluminum sector in recent years. The company also underscored increasing pressure from lower prices and dogged inflation, especially in terms of energy costs.

Stronger volumes and favorable exchange rates helped boost Alcoa's earnings, but they were "more than offset" by lower metal prices and higher costs, Alcoa CFO William Oplinger said on the call. Alcoa's second-quarter attributable net income increased year over year to $549 million from $309 million, while adjusted EBITDA was up $295 million to $913 million year over year but down $159 million from the previous quarter.

Meanwhile, Alcoa President and CEO Roy Harvey raised potential measures the aluminum producer could make amid an extended pricing rout. "We can step into partial curtailments, full curtailments. There's a lot of actions that we can take," Harvey said.

Economic headwinds have hit expectations for metal demand, commodity prices and earnings for the rest of the year. S&P Global Commodity Insights recently cut its copper price forecast to $8,847/t for 2022, as it downgraded demand projections for some regions such as Europe, said Commodity Insights principal analyst Ronnie Cecil.

The gloomier economic outlook could mean miners hold on to more of their profits as they look to weather lower metal prices.

"Near-term earning guidance and shareholder returns are certainly tempered by near-term commodity prices and cost inflation," Franco-Nevada Corp. Chair David Harquail said in an email.

S&P Global Commodity Insights and S&P Global Market Intelligence are owned by S&P Global Inc.

S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.