In my role, I spend all day every day speaking to individuals who either work in or are directly affected by, the mining industry. To this day, the subject of the mining industry downturn is one of the hottest topics that my candidates, clients and I find ourselves discussing. This does make sense though, the majority of clients I work with in the sector are equipment and service providers to the mining houses and when they talk to me, it’s usually about headcount, and to make decision on headcount and spending, they have to take the general health of the industry into account.
When reflecting on the conversations I have had this year about the industry as a whole, the general tone has been one of cautious optimism and that the worst is over. However, the cautious was in bold for a reason, and improvements are slow at best.
With that in mind, I wanted to take some time to write about some of the major factors that I think are having an impact on this ‘cautious optimism for the second half of 2017!
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 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, and Sandvik also recorded profit of 3.51 Billion SEK vs a forecast of 3.17 SEK Billion - attributed to a recovery in their mining division. Finally, Atlas Copco’s earnings before interest and taxes increased to 5.71 Billion SEK from 4.17 Billion SEK from Q1 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 when they are soon released 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 etc.. all have to be taken into consideration when making long term decisions, and these can all change every time a new government comes into power.
The big change this year was the ascendancy to power of Donald Trump. When he came to power in January 2017 it was on a wave of positivity and belief from the U.S Natural Resources industry who saw an opportunity to elect someone who 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, still early days to make any predictions, but the campaign trail promises and early legislative actions have been leading the experts to believe that the overall effect on mining will be a positive one.
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, as the graph below demonstrates, 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.
That being said, 2016 did seems to indicate that we’ve seen the bottom, and that the lowest of the commodity prices are now behind us and the research suggests steady and slow growth is now expected, which in turn will lead to investment in new projects by 2020.
For years now 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 production of steel.
This is further emphasised by the inventories of iron ore in China’s ports increasing by 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 an increase in demand for metallurgical coal is believed to have added 1,300 jobs to the US metallurgical coal industry since December.
Realistically, mining has had a tough few years, and when I first had the idea to put this article together, after speaking to a multitude of clients and candidates, I was under no illusions that we were in a period of exponential growth.
However, whilst it’s unlikely that the industry is likely to recover to the heady heights of where it was in the past, there at least appears to be a trend of leaner companies emerging 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.
This can be seen in mining houses re-investing in new, cheaper areas or mining divisions of major companies moving back to profitability.
I’d be really interested to hear the thoughts on my network on this topic though – are we being too cautious? Is a recovery just around the corner or is lower for longer the new norm? I’d love to hear the thoughts of my network, so get in touch, and let me know your thoughts!