In early 2015 the global mining industry is under intense pressure as falling commodity prices force all miners into cash preservation and cost cutting measures. These have resulted in mass lay-offs, write downs and projects being stalled or cancelled. Even for resource-rich countries like Australia the days of basking in the triumphs of the mining boom are well and truly over and 2015 will see more of the ‘batten down the hatches’ mindset.
This is a bitter pill to swallow for mining companies and for all those associated with the industry in any way. Not only has the cost squeeze and self-preservation hit all mining companies but it has also strangled mining service companies with firms slashing spending, mine fleets stalled and thousands of jobs at risk.
At this time last year I was not alone in saying we had hit the bottom of the cycle but there was obviously a lot of downside to go and even now it would be unwise to say we are at the bottom. With commodities still sliding, it is difficult to be optimistic about the first six months of 2015 and we can only hope the second half will be better.
The coal and iron ore sectors look particularly depressing, which comes after a lengthy period of unprecedented highs. This has hit big miners hard and the mid-size and junior sectors even harder but has also come at great cost to countries rich in these resources, including Australia, Indonesia and India. Much of Australia’s economic wealth in the past 10 years is directly related to coal and iron ore, which were feeding China’s unbridled growth, so the falling prices have hit extra hard, despite the current government removing the burdens of the carbon tax and mineral resource rent tax. Removal of these was intended to give the mining industry a boost but unfortunately prevailing global conditions have removed any of the intended benefits. The relatively high value of the Australian dollar has exacerbated the downturn.
Companies involved in iron ore and coal have been forced to curtail operations and put staff off in order to survive. BHP Billiton recently announced the lay-off of 700 at central Queensland coal operations run by the BHP Billiton-Mitsubishi Alliance, one of the world’s largest exporters of met coal. The lay-offs follow the loss of hundreds of jobs at New South Wales coal mines and 500 jobs in BHP’s iron ore division earlier in 2014.
In this instance, the resources industry has not been able to fall back on other metals as all resource prices have fallen and remain under pressure. The gold sector has been particularly hard hit due to falling gold prices and it appears certain many smaller exploration companies, and even some of the costlier or inefficient producers, will disappear during 2015. High grades and low costs will be the key to survival. Other sectors are also struggling, including copper and most other base metals, silver, oil, gas, PGMs and uranium.
There is some upside for nickel and bauxite owing to Indonesia’s ban on the exports of raw materials with that nation previously being a major supplier of these raw minerals to China. This has benefited producers of these metals in the Philippines, South Pacific and to some extent Australia. Zinc is steady while uranium appears to have a positive long-term future.
With increased pressure on all miners it seems certain that M&A activity will increase during 2015 with juniors at most risk. Stronger mid-tier miners appear more likely to generate this activity while investment from China will be more cautious. Also on a more positive note, encouraging noises from Mongolia’s government in recent weeks are a sign that the resource-rich nation may be starting to turn the corner, although it has a long way to go for any recovery and return of investment.