Mining output cuts and shelved investment plans are laying the foundations for a strong metals price recovery when the world eventually returns to growth, fund manager BlackRock said.

But London-based Evy Hambro, managing director at BlackRock, said that until the global economy starts to respond to large fiscal and monetary stimuli, prices of industrial metals will stay near the marginal or highest costs of production.

When demand recovers will be dictated by how quickly all that money feeds through ... When you get prices trading around the marginal cost of supply, you are at the level where prices start to stabilise, he told Reuters last week.

Over $50 billion of mining investment has been cancelled for this year 2009, 66 percent of all capital expenditure scheduled for the mining space this year. That sows the seeds of the next bull market.

Production cutbacks around the world started in the third quarter of last year as the market began to price in rising chances of recession in the western world and a significant slowdown in the emerging world.

Benchmark copper on the London Metal Exchange is down more than 60 percent at around $3,380 a tonne since a record high of $8,940 a tonne last July. The metal, widely used in power and contruction, touched a four-year low of $2,825 a tonne in December.

BlackRock reckons large cutbacks have taken out about 13 percent of the world's aluminium production, 15 percent of nickel and 10 percent of iron ore output.

These are all huge cuts, much bigger than we've had at any time in the past. They also happened more rapidly than in the past, Hambro said.

Output cuts and falling prices of raw material also mean costs have fallen. For copper, analysts estimate the marginal costs of production at near $2,100 a tonne, compared with levels above $3,000 a tonne early last year.

But Hambro says that the biggest cost component is actually the grade of operation. Over the years, the content of metal in ore has been declining pretty rapidly.

Certain mines are getting pretty long in the tooth, a bit old and mature, he said.

Most mining companies are probably trading below the replacement cost of their assets and well below the replacement cost of new capacity ... That's a great sign of how cheap the mining companies are today.

Top holdings in BlackRock's World Mining Fund at the end of December included mining giant BHP Billiton, Vale, South Africa's Impala Platinum and Australian gold miner Newcrest Mining.

The fund, with more than $4.8 trillion under management at the end of last year, lost about 60 percent over 2008, but over the last 5 years it has returned about 28 percent. (Reporting by Pratima Desai; editing by Anthony Barker)

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