Darnbrough: How has the market changed for your sector over the last six months?
Melrose: Sandvik Mining and Construction is made up of five sectors: Construction, exploration, underground hard rock, underground soft rock and surface mining. Each one of these has been affected to a different degree.
Exploration has been the hardest hit section. It started very quickly and stopped very quickly.
We have had some cancellations of orders in our underground hard rock sector.
However, surface and underground coal have not been affected to the same extent and that is because both those industries are dealing in bulk commodities; to date, we have found that coal has not been as dramatically affected.
Darnbrough: Do you think the areas that have managed to remain unscathed so far will continue on this road?
Melrose: If you had asked me two months ago, I would have been a little more bullish. However, in the past couple of weeks, as we have gained a better understanding of where China is in terms of steel making, I am a little more cautious.
Certainly, I do see supply and demand suffering.
Darnbrough: What are the major trends and variations in the market that you would expect to see over the next 18 months, and in the longer term (five years)?
Melrose: I think most people have taken a wait and see approach. Because this downturn happened so quickly and was so dramatic, most companies have put their capital expenditure on hold or significantly reduced it.
People are still unaware of where the market is going to go.
In saying that, I am a bit concerned about the ‘sky is falling’ commentary. If you look at the facts, Australia is better placed than most developed countries to ride out this 2009 global downturn.
We have a sound banking system, in that we have had only about 1% or 2% exposure to the bad debt situation around the world. The government is still in surplus so it can stimulate the economy if required— and already has started to do so..
We are running at a low unemployment rate, which indicates that there are a lot of people with money to spend.
We have cut our interest rates by 3% already this year, but because we are not like some other economies that are down to 0.5%, we still have a reasonable amount orf room to move.
Around 60% of Australia’s export market is into Asia, which is still one of the world’s more buoyant economic regions.
There are several other factors that suggest that the Australian economy is not as badly placed as some of the others.
For instance, the Australian dollar has dropped from being worth mid-90 US cents to aound 60; with all metal prices in US dollars, I would suggest that there are some operators out there who are making more money now than six months ago because of the exchange rate.
Irrespective of the drop in commodity prices, there are opportunities for companies to continue to make significant returns because they are offset by the downturn in the Australia dollar.
We need to be tempered by reality.
In saying that, however, most of our mining businesses are global companies and will not just see this economic situation from an Australian perspective so, in turn they are forced to tread warily.
Darnbrough: What will happen as more countries fall into recession?
Melrose: I think one big advantage Australia has is that 60% of our exports go into the faster growing economies such as those of Asia. There will obviously be flow-on effects, but what those effects will be cannot be determined or predicted.
Darnbrough: What are the key risks for business in your sector moving into this period of slowing economic activity?
Melrose: Australia can be said to have two economies. One is the mining economy; the other is the domestic economy. If you are in bulk commodities or mining, the economy has been about as good as it can get in recent months. On the other hand, if you were in travel or retail, times have been tough.
In recent months, however, it seems the good fortune has been reversed. Today, junior explorers are facing an uphill battle in terms of raising capital.
The harder this bites, the more likely junior explorers are likely to be thrown out of the market. Major companies will continue to push through.
If you read some of the commentary on the subject, this is a 20-year cycle. There will be peaks and troughs.
We are in a trough at the moment, but over the longer term, industry prospects still appear to be sound. We have hit a bump in the road and just how big that bump will be is yet to be determined.
Darnbrough: What actions would you expect from companies in this market as they move to mitigate potential risks to their businesses?
Melrose: I think smaller companies will struggle. There is very little appetite for lending capital at the moment. If large companies are able to fund projects internally, they will continue to do so, but they will do it more judiciously.
People are waiting to see what is going to happen over the next few months. They are waiting to see if this will continue or to see if it will plateau.
Darnbrough: What advice would you have for the minerals processing and mining professionals, as well as suppliers and distributors in this sector, as we move into 2009?
Melrose: I think for the business we are in, it is important to focus on the service we provide. Ideally our business should be one that can help a customer and add more value to their project.
Darnbrough: Are there opportunities in an economic climate such as this, and if so, what are they?
Melrose: Right at the moment there is no appetite for exploration.
Once it starts to move, it may do so quickly; however, it is getting things to move in the first place that is proving the biggest hurdle for companies.
Companies are battening down the hatches to see what happens.
The big players are global entities and they have global analysts and treasuries. So, there is a real global feel in the Australian market at the moment. With that in mind, I think they are being cautious.
Some of these big players, their PE ratios are now down four or five times which is unusual for the type of business they provide.
Darnbrough: What key messages would you have for the mining audience on the economic times ahead?
Melrose: Mining and construction have historically been cyclical businesses. The players that have strong brands will stay on course. As you would expect, this industry has ups and downs. We are currently going through a down period, but we remain positive about the longer term.
In the short term, businesses will be more selective about the type of projects they undertake so that they can remain profitable in hard times.