Happy New Year. As 2015 begins, most mining companies will gladly bid farewell to 2014. As it does every year, E&MJ published the Project Survey. Readers will notice that the tabular data that describe many of the new projects is much shorter than years past. The survey sums it up succinctly, “…boardrooms have become increasingly reticent to commit to high-budget investments until greater market clarity re-emerges.”
The current economic setting looks worrisome. As oil heads toward $50 per barrel, mining companies might see operating costs decline, which is good news unless they are mining oil sands. Metal prices have either held steady or declined in the last year. Slowing growth in China is exacerbating the situation, while a strong U.S. dollar is also having a pronounced effect on the global economy.
The outlook for China’s steel market has deteriorated. The latest Platts China Steel Sentiment Index was 23.1 out of a possible 100 points. Expectations for new steel orders are falling. Many steel producers have recently announced they are idling capacity. Major iron ore miners, which account for a large chunk of mining investment, have no intention of slowing output. During the last year, iron ore prices have dropped to $72 per metric ton (mt) from $132/mt. Prices for metallurgical coal, which is also used for the steelmaking process, have slipped from roughly $150/mt to $120/mt in the last year.
Copper (the No. 2 non-coal mining investment destination) has dropped from $3.33/lb a year ago to $2.78/lb. The drop in copper prices is not near as steep as iron ore and many believe a recovery will begin to take place in 2016. On the precious metals side of the business, gold has managed to cling to the same level it was a year ago, roughly $1,200/oz. Platinum prices on the other hand have almost reached parity with gold, which is a rare occurrence. Silver has dropped a little more than $4/oz in the last year to around $16/oz.
The good news is that there are a lot of mines currently operating and producing the commodities a modern society relies upon every day, from laundry detergent to the diamond on the bride’s finger. The bad news is that the mining companies are not opening as many new mines, opting to add incremental capacity instead. This changes the game for the companies that supply equipment and services to the mines. In its fourth quarter earnings statement, Joy Global, one of the largest mining industry suppliers, reported that its bookings were down 27% from a year ago. They know that the mining business is cyclic and they have wisely modified their business plan to meet customer needs. In the same statement, the company said it will remain focused on improving its cost position and responding to the mines with superior service until the market improves.
While one could interpret the current market data and this year’s Project Survey as more bad news, it’s a snapshot of where we stand as an industry. There is, however, a big difference between maintaining current production levels and tabling future projects, and idling and closing mines. As we saw during 2014, a lot can change in a year. If one looks at where we were as an industry in 2002 and how far we have come, 2014 could be the calm before the storm. The unknown is whether the storm will be a commodities collapse or the beginning of another bull run. Optimists have always ruled the mining business. Enjoy this edition of E&MJ.
Steve Fiscor, E&MJ Editor-in-Chief