COLUMN-Commodity companies' cost-cutting stampede yet to work: Clyde Russell

--Clyde Russell is a Reuters market analyst. The viewsexpressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, May 20 (Reuters) - If you ever neededan example of the corporate herd mentality, then look no furtherthan the stampede of cost-cutting among commodity producersstarted by BHP Billiton.

Since the Anglo-Australian miner moved last August to scrapor delay projects and slash operating costs, mining and energycompanies have been rushing to do the same.

In the past few months, no less than $15 billion of cuts incapital and operating expenditures have been announced, and thisis likely just a small percentage of reductions still to come.

What started as concern among investors in BHP Billiton andits fellow Anglo-Australian miner Rio Tinto overexcessive capex amid slowing demand growth for commodities fromtop consumer China has spread across the world.

In recent weeks several Canadian miners have announced cutsto capex, and newly-merged Glencore Xstrata haspromised aggressive cost-cutting, with some investors confidentit will exceed its target of $500 million in reductions.

And it's not just miners joining the cost-cutting frenzy,with Singapore-listed commodity firms Olam International, Wilmar International and Noble Group announcing cuts up to about a combined $2 billion incapex.

Wilmar isn't a mining company at all, rather being focusedon agricultural commodities such as palm oil and soybeans, andwhile Noble and Olam both own assets, their core strength is insupplying commodities to customers.

Even energy companies have been trimming costs despite notbeing as adversely affected by the concern over slowing growthfor Chinese demand for resources, which has mainly focused onmetals such as copper and bulk commodities like iron ore andcoal.

Heavyweight Exxon Mobil has said it would lowercapex 4.5 percent to $38 billion this year and for the "nextseveral years" from 2012's $39.8 billion, while U.S. oil and gasexplorer SandRidge Energy said in early May that it wouldcut spending by $300 million to $1.45 billion this year,revising a February estimate.

Cutting costs has replaced developing new projects as themantra of resource companies, and it's likely that far more isto come.

While Australia has $188 billion of liquefied natural gasprojects approved and under construction, the chances that morewill be sanctioned are dimming.

Already Woodside Petroleum, the nation's largestoil and gas producer, has shelved its Browse LNG project inWestern Australia, saying the economics no longer stack up.

Speculation is also mounting that Royal Dutch Shell and its partner PetroChina will defer their $20billion Arrow LNG project in Queensland, on Australia's eastcoast.

The Arrow venture is the last of the four coal-seam gas toLNG projects planned for Queensland and rising costs anddifficulties in securing adequate gas supplies may make it moreviable for Shell to scrap building its own plant and insteadsell gas to a rival operator in exchange for an equity holdingor offtake agreement.

SUPPLY GLUT, COSTS BLOWOUT

The reasons for the rise of cost-cutting and spendingcontrols follow two broad themes.

These are concern about over-investment leading to a glut ofsupply just as China's economy matures and the developed worldstruggles for growth momentum, as well as increasing labourcosts and taxes undermining the profitability of new ventures.

There was also the demand by investors for higher returns toshareholders from resource companies, which generally used thewindfall profits from the boom years from about 2004-08 and2009-11 to invest in boosting supply rather than dividends.

BHP Billiton, the world's biggest miner, has pledged toincrease returns to shareholders while cutting capital andexploration spending to $18 billion in the current financialyear, down a fifth from the year before.

If the $4 billion in savings was added to the bottom linefor the year to June 2012, it would have boosted BHP's netincome 26 percent to $19.4 billion.

That's obviously too simplistic a view, but even thosefigures gave an idea of the scale of what BHP is trying to do,namely deliver a significant increase in cash available toreturn to shareholders in an environment of declining prices formany of its key commodities.

The jury still appears to be out on whether BHP, and indeedother resource companies, will succeed in boosting returnsdespite price pressures.

BHP has the biggest market capitalisation in the S&P ASX 200index, the Australian benchmark, with the second spotfilled by Commonwealth Bank of Australia.

Since BHP's announcement on Aug. 22 last year that it wasentering a new era of austerity, its share price increased 3.7percent to close at A$34.41 on May 17, while over the sameperiod Commonwealth Bank has jumped 32 percent to A$73.21.

And it's not just that Commonwealth Bank is an exceptionalperformer, as the overall index has risen 18 percent, its gainsbeing held back by commodity companies like BHP.

Rio Tinto is up 2.2 percent since August last year, andmodest increases aren't only limited to Australian-basedcommodity producers.

Wilmar is up 6.9 percent, Exxon Mobil by 5 percent and Shellby 0.4 percent, all of them underperforming their respectiveindexes.

But it could be worse, if London-listed Anglo American is anything to go by. Its shares have declined almost 18percent since August last year, and it also happens to be one ofthe few major mining companies yet to announce a cost-cuttingand restructuring drive.

New Anglo American Chief Executive Mark Cutifani haspromised such a review by July, and it will interesting to seeif the company's share price can post gains, assuming the formerSouth African company also follows the cost-containment route.

If you believe that the resource companies will be able tocut costs by more than commodity prices decline, and furthermorewill return capital to shareholders, then they are probably agood buy.

Currently, they may seem too risky compared to the higherdividends already being offered elsewhere in the equity market.

Disclosure: At the time of publication Clyde Russell ownedshares in BHP Billiton, Rio Tinto and Commonwealth Bank as aninvestor in a fund. He may also own other shares mentioned as aninvestor in a fund.

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