Data is a funny thing. You can slice and dice it any number of ways, but often you need to go deep and evaluate the underlying fundamentals to understand what is really happening.
This is also the case for the Australian mining industry. The spectacular bust following the boom in the commodity markets for the better part of the 2000s has placed a significant strain on the Australian economy, as well as forcing miners to fundamentally rethink their businesses. After some very meagre years with commodity prices at very low levels, the fundamentals appear to show the worst is over. Commodity prices have started to recover, and the capital investment austerity appears to be a thing of the past as miners look to increase capital expenditures going forward, albeit modestly. China continues as a main buyer of Australian resource exports, and although the growth is lower than before, the absolute levels of imports remain significant.
And in all, indications are that Australian demand for mining machinery could be about to pick up.
From boom to bust
The global commodity boom benefited rural Australia more than most. The number of people employed in coal mining alone rose from 15,000 to 60,000 between 2001 and 2014. More than 20 years of growth in the mining industry was driven largely by China’s insatiable desire for the raw materials needed to drive the manufacturing miracle, relentless infrastructure development and urbanization.
But as China’s economic growth began its overdue slowdown as it matures from an investment-led to a consumption-led economy, the growth in the demand for raw materials dropped, and this put the brakes on the Australian mining industry. The impact was immediately felt both by equipment manufacturers as well as across the supply chain. Current shipments of mining equipment to Australia are on levels last seen in the late 1990s.
However, there is reason to be optimistic. Mine owners have undergone serious restructuring: reducing debt and leverage, cutting costs and investments, and ridding themselves of assets that were bought in the good times. As such, they are now very different beasts than they were five years ago, and their cash flow is back in positive territory. Slowly, their appetite for investments is coming back.
On borrowed time
As capital expenditures, and with them investments in machinery, were slashed during the slump, a fundamental imbalance has started to build up as a result.
As mine owners looked to get as much return on their existing investments as possible, they boosted production and worked hard to bring production levels up. A focus on efficiencies has extended the life of excavators and loaders, running them harder and longer than ever before. It’s been said that some operators have found ways to reduce idle time by as much as 20 per cent. Similarly, the average lifetime of machines operated in Australia has increased.
Forecasts for Australian resource production point to continued growth from today’s record-high levels. Production, however, consumes machines that at some point have to be replaced. At the current low level of shipments to Australia, it is quite clear that this replacement is not yet happening to the degree one might expect. At some point something has to give. The existing equipment cannot be used forever, and replacement activity will have to increase.
More to come from the Chinese economy
A common misconception when discussing the drop-off in demand from China is that Chinese demand for raw materials is waning. While it’s true that growth has slowed, the economy and demand for raw materials from China will continue to grow in absolute terms for a long time to come. Rio Tinto, the mining behemoth, foresees annual global growth in demand for iron ore of around 2 per cent until 2030, with China still making up the bulk of this demand.
With a population of more than 1.3 billion people, of whom tens if not hundreds of millions more are expected to move into cities over the coming decade, there’s no reason to think China’s investment in infrastructure – and therefore demand for metals – will go into reverse.
Of course, the industry is not 100 per cent reliant on China. Other countries will also drive demand. As India further industrializes, it will become an even bigger player in the world metal markets, increasingly picking up the baton after China in the years to come.
Experts in agreement
The Parker Bay Company, experts on the mining industry, seem to agree. According to their quarterly Surface Mining Equipment Index, equipment deliveries in the third quarter of 2016 increased 13 per cent over the second quarter, with particular growth in shipments of smaller machines. Although they estimate total 2016 shipments will be down on 2015, they also state that over the next five years, more than 10,000 trucks and 2,000 excavators/loaders are needed to replace machines deemed unfit for continued operations due to age and wear.
So, while at first glance the thought of a recovery in the Australian mining equipment demand might seem outlandish, the fundamentals suggest we are about to turn a corner.