The mining industry has not been for the faint-hearted during the last month. The iron ore price, for example, plummeted again in mid-September after a tumultuous year. The industrial metals rally has also grown more selective.
Key commodities like copper and nickel are sliding after months of strong growth.
But, it’s certainly not all doom and gloom. Since early 2016, iron ore prices have risen by 50%; zinc prices have almost doubled; and copper and aluminium prices are 35% higher.
Cost discipline is paying off
Fuelled by these price gains, confidence is returning at the mining giants. After years of aggressive cost-cutting measures, the most efficient players can now get their iron ore from ground to port for around US$30 per tonne. This means they can make handsome profits even if the price continues to slide from today’s levels just above US$60 per tonne.
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On the back of price hikes and cost discipline, mining shareholders have experienced a dramatic turnaround from prior years’ misery.
Just 18 months after the miners had to abandon progressive dividend policies and slash investments to stay afloat, investors are being showered with cash. Also on a mission to strengthen their balance sheets, giants BHP, Rio Tinto, Anglo American and Glencore have collectively reduced their net debt to about 50% of the level at the end of 2014.
No spending spree in sight
The miners appear to be on a prudent spending path to avoid reliving the volatility of recent years.
But as they shrink with every tonne of ore leaving the ground, there is no way around putting money into their resource bases. Investments by the majors have fallen every year since the peak, and are now approximately one-third of the record levels of 2012. But, there are signs that investments will edge up over the next few years, with the most notable uptick in 2018.
Interestingly, with growth projects across the sector now largely completed, the growth driver going forward is sustaining capex. And while investments in new machines are believed to have been below sustainable levels in the last few years, there is also pent-up demand for aftermarket parts.
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The parts of the machinery fleet that were commissioned during the boom are still in the early stage of their lifecycle.
For example, with an average chassis life of a large mining truck of around 80.000 hours, it can operate for about 13-15 years with today’s utilisation levels. And, with industry currently changing engines every 4-5 years, many a truck is now ready for an engine replacement.
Caterpillar, Atlas Copco and Sandvik all posted mining revenue increases of 15-25% in the second quarter of 2017. Aftermarket sales were highlighted by all three, with Atlas Copco and Sandvik stating double-digit gains for this part of their business.
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While aftermarket sales are building momentum, new machines are also rolling off the production lines in increasing numbers. According to Parker Bay’s Mining Equipment Index, deliveries of mining equipment have risen for the past four quarters, with deliveries in Q2 2017 an impressive 92% higher than for same quarter last year. While Q2 2016 represented a very low base and the bottom of the contraction cycle, this means that truck deliveries have more than doubled in 2017.
Commodity cycles have once again proven how difficult they are to read, and what happens next is anyone’s guess.
But, the signs are there that the mining industry has reached the bottom of the pit and is now on an upward turn.