Mining industry: Orderly retreat

For more than a decade, the mining industry has been somewhat of an economic poster child, forging ahead even when the rest of the world came to a grinding halt due to financial mismanagement and speculative investment.

But financial misfortune has now caught up with the model student as well. Net profit was down 49 per cent to $68 billion (€51 billion) in 2012, while volatile commodity pricing, an escalating cost base and $45 billion (€33.7 billion) in impairment charges hit the bottom line. As a result, investors around the globe are now openly discussing a change of direction.

In fact, the insecurity has already led to a genuine ‘confidence crisis’ in the mining business – at least according to a report by UK consulting firm PricewaterhouseCoopers (trading as PwC)*. “Over the past decade, the mining industry has outperformed the broader equity markets, but this trend has recently changed. While 2012 saw mining stocks fall slightly, they fell nearly 20 per cent in the first four months of 2013,” PwC said in the report.

As a result, the market is now in a phase of re-orientation and consolidation, shifting its focus from Australia, Europe and the US to the developing world. In fact, growth in places as diverse as China, India, South East Asia, Africa and Latin America has already outpaced growth in the west, and even with some slowdown expected in China, the International Monetary Fund (IMF) forecasts the emerging world will average about six per cent growth or more through to 2016.

“The short reason for this is that these economies are growing. They need cities and infra-structure to be built to cater for their growing populations,” PwC said. “Resources are the means to this end.”
However, the changing regional focus does come at a price. The mining industry will have to overcome a wealth of technical, political and HR issues at the same time as it is required to placate unceasing shareholder calls to assert strict capital discipline – and to provide a solid payback.

In that sense, the days of maximising value by solely increasing production volume are gone. The future is about managing productivity and improving efficiency, both of which have been neglected in the past, if PwC is right.

The future on the heavy transport equipment industry will be directly connected to that development. Naturally, the focus going forward will be on maximising returns from existing operations through managing productivity and improving efficiencies – a mission the trailer manufacturing industry can certainly contribute to.

But competition will be fierce. Pricing, tare weight and the flexibility to react to regulatory change will decide on weal and woe of the individual business, even more so than build quality and performance in the field. Plus, there is one more problem the trailer manufacturing industry has to face. PwC has predicted that to rebuild the market’s confidence, mining firms are likely will scale back capital expenditure and dispose all non-core assets, so investment into the development of more versatile, lightweight equipment may not be offset by growing sales volume.

Take Australia, a classic stronghold of the resource extraction industry. The country was able to ride the wave of the mining boom for more than a decade, but business sentiment is now free fall, as The Australian reported in July. The report revealed a sharp negative shift in sentiment among industry leaders, mainly because “commodity prices have not come back” despite a yearlong wait. As a result, miners have declared they are reducing capital expenditure – not just postponing or moderately increasing it.

According to The Australian, the renewed focus on costs means miners are now “talking tough” with suppliers, arguing that those you have enjoyed the benefits on the way up should also share some of the pain on the way down. And, the effect on trailing equipment industry is already palpable. Overall, less equipment is being ordered, less stock is required, and less people are needed. The focus, like everywhere else, has shifted to cost control and productivity.

It’s not an Australian problem, though. According to PwC, equity investors are content to sit on the sidelines and wait for improvement. Given the fact that they have to back a mine for years and in very large sums to turn it into a revenue stream, the hesitation is likely to last until the redistribution process is finalised.

As a result, suppliers could be up for a waiting game that will leave them vulnerable to the mood of the globalized commodity market. Swedish industrial Sandvik, for example, recently reported a 33 per cent decline in Q2 profits due to lower demand from mining industry; and Canada’s Toromont Industries saw a 14 per cent decline in equipment revenue in 2012, which included significant deliveries to mining customers not repeated in 2013. Even mining-related transport businesses are now being eyed by hedge funds looking to bet against them.

“2013 will be all about asset rationalisation and deal activity will be driven mainly by senior miners looking to divest non-core assets and looking to de-risk projects through joint ventures,” PwC concluded.

But it’s not all doom and gloom – mining is still a profitable business, and transport equipment will still be needed. China, for example, has surpassed the US as the world’s biggest trading nation in 2012 and will therefore continue to locate resources to meet its expanding economy. US company Research and Markets reported that over the course of the twelfth five-year plan, “the domestic mining and quarrying equipment manufacturing industry will continue to maintain a rapid growth rate, and the growth rate of annual average output value is expected to reach about 22 per cent.”

Given the on-going globalization of the mining industry, the trailing equipment will be forced to get creative to maintain growth and ensure financing – either by supplying technically advanced solutions or trying to create synergies in the market. In Australia, national trailer conglomerate MaxiTrans has recently gone for the second option, taking over Queensland-based mining equipment specialist Azmeb. The acquisition will give Azmeb the backing needed to increase its global footprint and develop smart equipment for a demanding market.

Azmeb Sales Manager, Grant Kemp, says that Africa should be a key target for mining equipment suppliers from around the world. “We expect a lot of growth in the mining and construction markets in Africa … where we have already sold over 200 of our door-side tippers.”

Given the current redistribution movement, such a move may have come just in time. The importance for the African continent, for instance, has risen significantly over the past few years, culminating in the launch of a local mining and construction equipment trade show in Johannesburg, Bauma Africa, where Azmeb will be exhibiting as well. According to Bauma’s German-based organisation team, the inaugural trade fair has been a sell-out success with over 500 exhibitors taking up over 60,000 square meters of exhibition space.

Elaine Crewe, Chief Executive Officer of MMI South Africa, says that, “as investors and businesses look towards developing countries for new growth, the mining and construction industries are set to profit from this move.

“The need for infrastructure presents a growing opportunity for those present in these sectors to provide services and products throughout developing countries and benefit from this burgeoning growth. The growing pool of international entrants into the African market is a telling sign of just how important Africa is becoming and the need for specialised players in the industry.”

In addition, the European Union and Colombia have recently launched a new, bilateral trade agreement to boost trade and investment, which might be a first sign of an opening of the South American commercial road transport market to foreign-made equipment; and the fracking boom has not subsided yet as well.

Finally, the European Union recently filed a dispute with Russia over vehicle imports at the World Trade Organization (WTO), the first such challenge to Moscow since it joined the trade body a year ago. The EU said it had repeatedly raised the issue of a recycling fee imposed by Russia on imported vehicles, but to no avail. For specialist vehicles such as mining equipment, the fee can be extremely hefty, so a solution could open up that promising market to the global vehicle manufacturing industry as well.

*Mine – a confidence crisis. Review of global trends in the mining industry.  PwC, 2013

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