Top 10 mining trends for 2014 – 2. Market imbalances will wreak commodity price havoc

Prolonged market volatility is forcing miners to change the way they operate, making tough strategic changes in a bid to remain viable.

Releasing its sixth annual Tracking the Trends report, Deloitte global mining leader Phil Hopwood explains that mining companies are facing a climate marred by volatile commodity prices and shifting demand fundamentals.

“To rectify cost overruns, improve capital efficiency and rebuild investor relationships, companies need to sharpen their focus on productivity, sustainable cost management and enhanced shareholder value,” Hopwood said.

Deloitte warns supply-demand imbalances, falling commodity prices and lower productivity levels are challenges which mining firms will continue to face throughout 2014.

“Simply waiting out the market swing is not an option,” Deloitte said.

“Rather, pursuing innovation will help both juniors and big companies weather current headwinds.”

Over the coming weeks Australian Mining will be showing you what to expect in the year ahead, in a 10 part series which will analyse the top ten trends for 2014.

1. Mining productivity hits new lows

2. Market imbalances will wreak commodity price havoc

Iron ore, thermal coal and aluminium are all at risk of tipping over the edge into oversupply, Deloitte warns.

After years of unconstrained project development surplus supply and China’s impact on commodity markets are both factors set to make 2014 an interesting if not chaotic year.

“Government funding of aluminium production, for instance, is already pushing China’s aluminium costs down to a level that other producers can’t match,” Deloitte stated.

Ramping up its domestic production of gold and coal also has the potential to reduce China’s reliance on global imports.

Coupling Chinese influence with supply and demand dynamics, Deloitte said a serious commodity price devaluation could be on the horizon.

According to CIBC World Market forecasts by 2016 gold could hover at $US1383 per ounce, silver will fall to $US22.81 per ounce and copper will drop to $US3.17 per pound.

A new report from IBISWorld has highlighted a predicted boom in Australian diamond and gemstone mining in 2014, becoming the largest growth industry in the country.

Its study into the top five industry set “to fly and fall” in 2014 placed diamond mining at the top of the success list, predicting a 24 per cent growth in revenues year on year, increasing from $663 million in 2013 to $821 million in 2014.

This is a turnaround for an industry that was facing serious job cuts in Australia, with Rio Tinto only last year looking at a divestment of Argyle as part of the company’s wider strategy to get out of diamonds.

However the report was not all positive, listing mining exploration as one of the industries set for a decline in 2014.

This is no surprise for an industry that has already seen global exploration budgets take a massive hit.

Recent exploration budget slashings threaten to only exacerbate the demand and supply issues facing the mining sector.

Global non-ferrous metal exploration budgets have plummeted almost 30 per cent this year, new research suggests.

SNL Metal Economics Group’s Corporate Exploration Strategies surveyed almost 3500 mining companies around the world.

The group found total non-ferrous exploration budgets fell to $US 15.2 billion.

Major miners recorded a 24 per cent drop in exploration spend, whilst juniors took a bigger hit, with exploration budgets falling 39 per cent over 2012.

In Queensland alone explorers’ market capitalisation fell 31% in 2012-13 to $732 million.

Access to equity capital was listed as a significant problem with companies exploring in Queensland announcing $63 million in capital raisings in 2012-13, down 76 per cent in comparison to 2011-12.

Nationally, the amount of raisings was down 60 per cent in 2012-13 from $853 million to $342 million.

The latest IBISWorld report predicts the sector will continue to decline, falling another 7.5% over 2014.

“These adverse global conditions have suppressed world prices for the major commodity groups upon which the exploration industry depends,” Dobie said.

“The fall in investment in exploration also follows established miners shifting their focus from exploration to production.”

The number of troubled mining juniors is lifting and limited significant deposit finds means the sector’s nursery is shrinking.

“The resulting pullback in exploration budgets only threatens to widen the gulf between demand and supply and could ultimately tip the industry back into another heated production cycle, causing costs to careen even further out of control,” Deloitte said.

Looking ahead Deloitte’s Chile mining leader Christopher Lyon said despite short term laggings the long term fundamentals remain robust, reacting to short term conditions he says has resulted in companies mothballing projects, and capping capacity.

“Taken to its logical conclusion, this behaviour will tip the sector back into a scramble to build at any cost within the next five to ten years. It’s time to break this cycle by embracing new ways to do business,” Lyon said.


Tomorrow: Trend three – Innovate or die

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