Brighter outlook as demand for commodities recovers by Raconteur

The past few months will not be remembered fondly by the global mining industry. In February Marius Kloppers, chief executive of BHP Billiton, walked the plank from the Anglo-Australian giant after five years in charge following its worst half-year results for more than a decade. His departure followed the exit of his counterpart Tom Albanese from Tinto in January, while Cynthia Carroll, one of Rethe very few women in the industry, has now left after five-and-a-half years running Anglo American.

The departures reflect the deep problems facing the mining industry, which has come crashing back to Earth after a stellar run on the back of soaring commodity prices and insatiable demand for the likes of coal and iron ore from China and other fast-growing economies.

Meanwhile, operating and capital costs have soared, shaving margins, while labour unrest in some parts of the world have cut production and strained relations with governments and unions.

Some 2.5 million people worldwide are directly employed by state-owned and stock market listed mining companies, which indirectly generate work for tens of millions more.

As a result, companies across the spectrum have pulled in their horns, shelving expensive new projects and saving money wherever possible. BHP, for example, last year cancelled almost 26 billion of spending while shutting down loss-making coal mines and reducing costs by more than 600 million. Also, Rio Tinto reported its first annual loss in February after writing off more than $14 billion on its aluminium operations and coal mines in Mozambique.

The credit crunch has caused many projects to be deferred by years, if not indefinitely, which will result in higher commodity prices

Lee Downham, global mining and metals lead transaction partner at Ernst & Young in London, commenting on the perception of mining as a cyclical industry, says that negative sentiment across investors is in danger of going too far.

Stock markets are likely to remain challenging in 2013 and traditional project debt will continue to be available for only the lowest-risk, highest-quality projects, he says.

Given the prevailing financial winds, companies are shying away from risky countries when considering where to spend what limited capital is available for new mines or improving infrastructure at existing facilities. Miners are investing where the best returns are capital is constrained so it s being put where it will work hardest, Mr Downham says.

Countries, such as Australia and Chile, are perceived to be far safer places to invest than those with less stable governments, such as Venezuela, according to Ben Davis, a mining analyst at Liberum Capital, based in London. Even an open economy, such as South Africa, can become a less attractive destination for investment following incidents such as the industrial disputes that plagued its platinum mines last year.

It comes as little surprise, then, that Australia took the biggest slice of global deal activity in the mining sector last year, accounting for a 13 per cent share worth $14 billion as Asian companies in particular snapped up coal and iron ore assets.

While the giants of the sector have had their wings clipped, the junior miners were hardest hit when the credit crunch caused stock markets their main source of raising funds to crash.

Mr Downham says the crunch has caused many projects to be deferred by years, if not indefinitely, which he believes will ultimately result in higher commodity prices in the years to come.

One of the most difficult tasks facing the mining industry is estimating demand for the commodities it produces. China has played a significant role in sending prices to record highs in recent years and continues to import minerals in huge quantities even as domestic production increases. Concerns about a hard landing in the Chinese economy have abated, Mr Downham says, and demand will continue to rise even if the growth rate runs at slightly less stellar levels than double-digit figures posted until last year.

Demand in the United States which is set to be overtaken by China as the world s biggest economy as soon as 2016, according to some predictions is also rising once more, Mr Davis says, but it is not as important to miners as its more populous rival.

Another factor complicating the picture is the rise of resource nationalism in many countries.

Compared to oil companies, governments have been somewhat slower to slug miners with taxes and duties, Mr Davis notes. However, mining is far more cyclical and you do not want to kill the goose that laid the golden egg, he adds.

Environmental concerns are also rising up the agenda as governments enact more stringent rules on emissions and waste, while the increasing cost of electricity, oil and other resources becomes more of a burden for the miners. Competition for water is becoming more intense in many countries, with its cost in South African mining jumping as much as 40 per cent in the past five years.

Despite the myriad of challenges facing the mining industry, 2013 and beyond promise to be brighter for the sector as the BRICs Brazil, Russia, India and China along with other developing nations drive demand for natural resources in the long term.

Ernst & Young expects companies to refocus on growth in the latter part of this year as the pressure to replace depleting reserves and maintain production mounts .

To do so, corporate bonds can be expected to remain a popular source of finance.

One possible threat to growth could be demands for bigger dividends from shareholders, who have been increasingly frustrated by weak share prices and poor profits.

Regardless, Ernst &Young believes the current discipline across the sector will result in leaner business models and stronger balance sheets in the second half of the year leaving the industry more stable and better placed to focus on the future.

Continue reading here:
Brighter outlook as demand for commodities recovers by Raconteur

You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *

ERROR: si-captcha.php plugin: GD image support not detected in PHP!

Contact your web host and ask them to enable GD image support for PHP.

ERROR: si-captcha.php plugin: imagepng function not detected in PHP!

Contact your web host and ask them to enable imagepng for PHP.