I spend all day every day speaking to individuals who either work in or are directly affected by the mining industry. The subject of the mining industry downturn is one of the hottest topics that my candidates and clients often discuss. It makes sense. After all, any decision on headcount and spending has to take the general health of the industry into account.
When reflecting on the conversations I’ve had this year, the general tone has been one of cautious optimism that the worst is over. However, these improvements are very gradual. Think tortoise and the hare and you won’t be far wrong.
With that in mind, I wanted to highlight four of the major factors that are motivating this cautiously optimistic outlook.
1. Q1 Results
The health and stability of the mining industry is largely dependent on how the major mining houses are performing. If the mining houses struggle, the companies that supply and manufacture for them tend to struggle too. Therefore, it’s been good to see some strong Q1 (2017) results from some of the big names in the sector.
A look at the top players’ quarterly results show that Q1 was a success. Metso’s EBITA jumped 19%. Caterpillar shares rose 6.6% due to higher Q1 demand and revenue, while Sandvik also recorded profit of 3.51 billion SEK vs a forecast of 3.17 billion SEK. Finally, Atlas Copco’s earnings before interest and taxes increased to 5.71 Billion SEK from 4.17 Billion SEK from Q1 of 2016.
These companies have huge divisions that don’t focus on the mining industry; however, the consensus is that companywide growth like this wouldn’t have been possible without a more stable mining segment. It will be interesting to see Q2 results to make sure Q1 isn’t an anomaly.
I realise I’m brave mentioning this subject on LinkedIn, however bear with me. Politics plays a huge part in the mining industry. Factors such as legislation, costs, taxes, regulations and more all have to be taken into consideration when making long term decisions. It doesn’t help market’s stability that these change as frequently as new governments do.
The big change this year was the ascendancy to power of Donald Trump. When he came to power in January 2017, there was on a wave of positivity from the U.S Natural Resources with the belief that he would strip back regulation and reinvest in the sector. The coal industry, in particular, was in dire need of a jump start.
In terms of Trump’s reign, it’s still early days. But the campaign trail promises, and early legislative actions suggest that his presidency will have a positive impact on the industry.
Looking back, it looks as though 2016 was something of a watershed year. Market research companies including BMI and Citi reported that 2016 was a year of recovery, setting up 2017 and beyond to be a period of overall growth.
These findings also indicated that certain countries such as Zambia and South Africa are going to continue to attract development and investment due to their low production costs.
However, Capex spending in the Mining sector is still muted, with most companies not considering greenfield investments as they once were. Instead there is a focus on cutting debt and freeing cashflow.
Overall though, 2016 did seem to indicate that we’ve seen the bottom and that the lowest of the commodity prices are now behind us. Research suggests that a steady and slow growth is now expected, which will lead to investment in new projects by 2020.
For years, the demand, or lack of, for energy from China has had a huge impact on commodity prices. China’s fluctuation of demand for energy has had global effects and can be a major factor driving up or down commodity prices.
China’s imports of iron ore, a key component required in steel production, has reduced 2% YoY from April 2016 to April 2017, which has been indicative of the Chinese becoming more self-sufficient when it comes to the production of steel.
This is further emphasised by the inventories of iron ore in China’s ports increasing in excess of 15% YoY. Put simply, these factors show that if short term global demand is ever going to reach the levels they once were, it’s not going to be because of China’s thirst for materials.
Despite this there are reasons to be optimistic, global research company Wood Mackenzie believe that the Chinese government are on the cusp of another phase of intensive metal development.
Similarly, the restriction in working hours implemented by the Chinese government at coal sites and increase in demand for metallurgical coal is believed to have added 1,300 jobs to the US metallurgical coal industry since December 2016.
Furthermore, other reports suggest that although the short-term expectations on demand are relatively bleak, the long-term outlook could be more positive.
Realistically, mining has had a tough few years. While it’s unlikely that the industry will recover to the heady heights of where it has been in the past, there at least appears to be an upturn. This is reflected by many leaner companies that have adjusted to the new norms, re-positioned, re-organised and are now looking to grow and develop from a more secure and streamlined foundation. That’s why we’re seeing mining houses re-invest in new, cheaper areas and mining divisions of major companies moving back to profitability.
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