YEARLY SECTORAL ANALYSIS 2016
Global Mining Industry
Authored By: Metals & Minerals Practice, Frost & Sullivan
The global mining industry witnessed depressed commodity prices throughout 2016. There is a common consensus in the industry that it has reached the bottom of the cycle and growth will eventually return. Till such time, mining companies are trying to make the best of this harsh environment.
As confidence in the global economy is low, mining companies are ramping up their focus on cutting costs and performance improvements. Some of the common ways leading mining companies are responding are:
– Maintaining a strong focus on capital deployment to prioritize cash flow return over increased production volumes
– Keeping a close eye on cash flow generation by focused monitoring and managing balance sheets
– Most disciplined management and use resources and ore bodies guided by the principle of high growth and higher margin commodities
Looking for New Opportunities:
During the boom or up cycle in 2015, many metals and mining operations had invested heavily in new capacities. 2016 was a year of constant effort to search for new growth opportunities or consolidate operations to help absorb this production capacity, and mining companies struggled with high fixed cost and footprints. Top mining companies are trying to attain balance by adopting some of the following steps:
– Exploring opportunities to purchase high value assets in new geographic markets to improve cost efficiency or drive scales
– Rigorously assessing potential risks involved in new acquisitions
– Continuously strive to reshape the portfolio of assets, products and markets to create optimal footprint for sustainable growth
The CEO’s Perspective of the Complex Business Universe
- Demand Drivers
The major growth drivers for mining companies would be minerals that are directly associated with Mega Trends.
– Changing lifestyle and social trends: Increased use of consumer electronics including smart phones will push the demand and prices of minerals like Gallium, Selenium, Gold, Mercury, Chromium, Niobium, Tungsten etc.
– Future of Energy: Growth in the battery market and electric cars will have a positive impact on the demand and prices of lithium
– Urbanization: New urban hubs will drive the demand for steel, aluminum, copper and construction materials
- Challenges and Restraints
Apart from the significant pricing pressure, mining companies are struggling with:
– High levels of over capacity especially in iron ore
– Supply chain efficiency
– Lack or lower demand visibility in future
– Lack of clarity on inventory levels and growth plans of metal companies
Market Outlook / Conclusion
There is an increasing confidence of potential growth over the next two years. Due to over capacity, almost every mining company is confident that its supply chain is ready for growth. Over the next one year we will see mining companies investing in unexplored high potential areas like Latin America. Although there will be significant pricing pressure on many minerals, some minerals like coal, graphite, lithium will show upward movement in FY2017-18. Mining companies will continue to focus of improving productivity, driving cost and eliminating downtime.
Iron Ore: Iron ore prices are not expected to increase significantly from current levels. In the short term, it is expected that capacity will continue to outstrip demand due to low-cost mines in Brazil and Australia, putting pressure on prices globally. All iron ore producers will likely struggle to achieve substantial bottom line growth in the current pricing environment.
Copper: Copper prices will continue to see pricing pressure, as many projects that kicked off during the boom started production in early 2016. At the same time costs are nearing record low as copper miners continue to drive cost containment measures. Till the time prices return to previous level, copper miners will continue their focus on long-term sustained productivity improvements within their existing assets.
Nickel: Nickel prices will be range bound for the first half of FY 2017 due to the recently proposed environmental initiative in the Philippines where more than 20 mines faced suspension.
Platinum: Demand for platinum from Chinese jewellery market, typically the single largest demand segment, will see a further dip in the medium term. Demand from auto catalyst industry is likely to dip slightly as lower-platinum-loaded catalyst systems are being introduced in increasing numbers in European vehicles. Mine supply is also expected to be flat till the end of 2017. However, supply of recycled metal from auto catalysts has the potential to rebound. With this balance, the prices of platinum will be range bound.