On Mining in General & China and Iron - Copied from a Yahoo Message Board.
This is 5 weeks old but nails the demand scenario perfectly:
>>>China has forecast 40-billion square metres of additional floor space in the next 20 years. At 75 kg of steel a square metre, three-billion tons of steel will be required over the next 20 years by the construction sector alone. For half a century, from 1963 to 2007, Australia supplied three-billion tons of contained iron-ore units, which means that in construction alone – excluding the many other sectors that consume steel – the same quantity of iron-ore will have to be supplied in less than half the time.
By 2015, China will have accumulated more steel in inventory than the US achieved in its entire history, says Kloppers. “This means that there will be a very large call on iron-ore, manganese and coking coal, a call that has no historical parallel,” he adds.<<<
Record resources demand leads to golden era for mining
Miningweekly: September 5 2008
It seems that mining has never had it so good. Having lagged other industries for decades, the last half-decade has seen an unexpected shift. Professional company PricewaterhouseCoopers (PwC), in June, published a resources study entitled: ‘Mine*– as good as it gets?’, and revealed that global mining revenue in 2007 was $312-billion, compared with global revenue of $95-billion in 2002.
PwC finds further that the commodities boom has directly resulted in mining companies becoming a major source of mergers and acquisitions (M&A) in what has become a golden age in mining, driven by both unprecedented demand and intensely constrained supply.
PwC African mining leader Hugh Cameron finds that the increase in demand is revenue driven, price driven, and volume driven. “Mining costs have increased a lot and no one has come along and found a way to mine at half the price and make profit,” Cameron says.
BHP Billiton CEO Marius Kloppers has reported the company’s seventh set of consecutive record results and draws attention to the “accumulative” nature of growth.
“China averaging 10% economic growth for an extended period of time cumulatively turns into not merely a percentage, but an absolute value in the world economy,” Kloppers calculates.
China began averaging high growth in 2001 and, by 2003, there was also an acceleration of growth in India, South-East Asia and other developing economies, like Russia.
Kloppers calculates that each unit of gross domestic product (GDP) in a developing economy is four to five times more material intensive than a unit of GDP in the developed economies.
The mining giants are thus, he says, leveraged to the developing economies, which are showing more resilience currently than the developed economies.
China has forecast 40-billion square metres of additional floor space in the next 20 years. At 75 kg of steel a square metre, three-billion tons of steel will be required over the next 20 years by the construction sector alone.
For half a century, from 1963 to 2007, Australia supplied three-billion tons of contained iron-ore units, which means that in construction alone – excluding the many other sectors that consume steel – the same quantity of iron-ore will have to be supplied in less than half the time.
By 2015, China will have accumulated more steel in inventory than the US achieved in its entire history, says Kloppers. “This means that there will be a very large call on iron-ore, manganese and coking coal, a call that has no historical parallel,” he adds.
Simultaneously, the supply system is struggling to meet this large demand.
Rio Tinto
One of the other big mining giants is Rio Tinto and its CEO, Tom Albanese, says he “remains upbeat” about the markets in which his company operates and will be investing $9-billion in capital projects this year alone.
“Rio Tinto is in tremendous shape with excellent mine earnings momentum. We are producing record volumes of most of our principal commodities and investing at record levels for the future.
“Our growth opportunities are excellent and the price outlook for our products is favourable,” Albanese says.
Vale is the new name given to what was previously Companhia Vale do Rio Doce (CVRD). But the CVRD tag has gone with the company’s previous nationalistic Brazilian past and new Vale CEO Roger Agnelli typifies the modern approach of a company that has a tradition of not only mining commodities, but also railing, shipping and marketing them.
The success of this giant is again exemplified in record shipments of iron-ore, record gross revenue, record operational profit, and a strong outlook.
Increased Mergers and Acquisitions
Cameron says that, as mining companies have had to produce more, they have not had sufficient time to conduct exploration, and have, therefore, sought either to merge or acquire other companies, as this allows them the opportunity to increase their reserves and resources faster by buying readily available or almost producing assets.
“Four or five years ago, companies stopped mine exploration and developing mines, and they are now restarting exploration and developing mines, but there is a long lead time. Companies are also constrained by the demand for major bits of equipment, and lead times for this equipment can often take over a year.
“If a mining company can buy another mining company that has an operating or near-operating mine, it can bring the mine on-stream faster. It is much easier this way, and companies, therefore, see value in acquisitions and mergers,” he says.
Professional services company Ernst & Young’s Brunhilde Barnard agrees, and says that mining is becoming a major source of M&A activity owing to early-stage companies accessing development capital through entering into joint ventures with more established mining companies, or off takers, or capital markets. Further, she notes, high prices, increasing emphasis on resource security, and access to reserves are contributing to the increased competition for assets, and consequent higher deal values.
Barnard says that other factors influencing the increase of M&As include the role of sovereign funds in securing ownership of resources, junior mining companies seeking equity partners and major coal producers seeking to increase their business, as well as the importance of securing raw material supply leading to greater competition between coal-miners and steel producers.
Cameron believes that the M&A trend is set to continue in the near future.
“M&As are occurring all the time, as mining companies try to get a hold of the world’s commodity supply. There are synergies involved, as, if the company is bigger, it is likely to gain cost benefits for doing it,” he says.
However, junior mining companies are finding it more difficult to raise money owing to the current credit crunch, which will result in more takeovers.
“I do not think that one will find any junior mining company coming through the ranks in the next few years and suddenly becoming a major. What is more likely to happen is that as they become more successful, one of the majors will buy them out, and effectively come through to the top tier as being part of another company. It is unlikely that a small company will be able to grow itself to be a major in the top league,” he says.
Barnard notes that since the advent of the Mineral and Petroleum Resources Development Act, the South African mining sector has opened up to new players, resulting in many junior players entering the coal sector at the exploration and evaluation phase of the coal resource development continuum to assess the feasibility of developing natural resources.
Cameron says that some junior mining companies, such as Chinese and Russian companies, may still make their way into the top 40 mining companies, while he notes that the “Xstratas of this world” are “hanging around just outside the top tier”, and will probably ascend into the top ranks soon.
Adequate Mineral Resources?
Cameron says that while there are plenty of resources available to accommodate the commodities demand, mining companies face the challenge of the amount of lead time required to bring new mines on stream.
Barnard warns that although sufficient resources exist in South Africa, ‘low- hanging fruits’ have been accessed, and the remaining resources are typically lower grade and may have specific constraints to overcome, such as the distance to market, the lack of access to transport infrastructure and scarcity of electricity, before they can be exploited.
However, she notes that in the gold- mining sector, new mining has resulted in improved extraction processes, allowing for lower-grade mining and the reclamation of previously nonviable projects.
Financial Clout
While mining companies are generating financial resources internally, in the last year or so they have started taking on debt, notes Cameron. He says that these companies have the capacity to take on debt, as the gearing ratio in the mining industry has been quite low, and owing to the current commodities boom, banks are “happy” to lend them money. Further, he says these companies have access to cash through borrowings, and boast reasonable share prices at the moment. He states, therefore, that there is “plenty” of money available to the majors.
Barnard states, by contrast, that it is becoming increasingly tough for exploration and evaluation companies to raise equity in the current capital market environment. However, she adds that a well-structured and robust project or business case will find funding.
“We are increasingly seeing South African early-stage companies accessing development capital through entering into joint ventures, with either more established mining companies, or off takers,” she says.
Commodities in Demand
According BP’s annual statistical ‘Review of World Energy’ for 2007, coal remains the fastest-growing fuel, with growth in world coal consumption outstripping the growth of gas and oil for the fifth consecutive year, in 2007. Barnard says, therefore, that the key driver in increased mining prices has been higher commodity prices, despite margins coming under pressure owing to increased costs.
She notes that the global demand for coking coal is expected to outstrip supply significantly this year, with the shortfall not being met until additional supply comes on line in the midterm. High coking coal prices, she says, have induced producers to switch their production mix to semisoft coking coals, creating a further shortage in the thermal coal market.
Performing Commodities
Industrial metals have experienced the greatest boom in recent times, with a 2007 report compiled by PwC confirming that copper and iron-ore constituted 40% of commodity revenue last year, while traditional commodity strongholds such as gold and diamonds only constituted 11% of revenue. Cameron attributes this to the different drivers behind the demand for commodities.
“The drivers of a gold price and an industrial metal are completely different. Gold is generally not in huge demand. It is a store of wealth that rises when there are factors such as tensions in the Middle East and recessions. It is not driven by demand like copper and steel.
“Therefore, when there is a boom time in the mining industry, gold is not likely to rise as fast as other commodities do. It is a speculative metal, and, in some cases, a sentimental metal,” he says.
He notes, therefore, that resources driven by demand are likely to come under the most pressure, as one cannot get enough supply to meet demand, which raises the price.
Cameron says that coal and iron-ore are the commodities that will be the “winners” in the next year or so, while Barnard says that all commodities are expected to perform well in the next couple of years.
“The case for coal continues strongly, as well as platinum-group metals, owing to global demand in the automotive industry, while political instability remains a global factor in the case of gold. Manganese is also expected to perform well, owing to continued strong demand from the steel manufacturing industry,” she says.
In the South African context, she says, coal, iron-ore and manganese will provide the greatest growth opportunities. She says that the global coal market is currently characterised by tight demand-supply conditions, with supply remaining under pressure owing to the combined effect of labour constraints, a lack of investment, and restrictions on export, as a result of a lack of infrastructure capacity in key markets.
Challenges
Barnard says that production costs are escalating at rates greater than the inflation rate, owing to the shortage of skills, the effect of increased commodity prices on inputs such as steel, and increases in the price of fuel and electricity. She, therefore, says that the challenge exists of maintaining margins, and managing the risk of over- supply in local markets. However, she says, this is becoming increasingly difficult in an environment where major mining houses have a global footprint.
Barnard notes that coal supply is in “unchartered waters”, influenced by the global imperative to contain carbon emissions, and consequent growth in renewable energy generation.
“The challenge created by the current boom is the degree of uncertainty, which is now impacting on long-term forecasts, on which long-term decisions are based. Mining houses are racing to capitalise on current high prices, resulting in a risk of oversupply in the medium term, which may, in turn, result in depressed commodity prices,” she says.
Therefore, she adds, companies face the challenge of being the first to market and diversify with respect to commodity exposure.
What the Future Holds
Barnard says that demand from Brazil, Russia, India and China will continue in the medium term to drive the commodity cycle, albeit at lower growth rates. She says that as the cumulative effect of the demand for coal from these countries is unprecedented in recent history, it is unclear how this demand will play out in future with regard to growth rates and timelines.
Cameron agrees with this sentiment, but warns of possible threats to the boom in future.
“The prognosis is that China will continue with its mining activities, and then India will take over as the main country involved in mining if it goes through its development phase. So if a meltdown or a complete cooling off occurs in China before any other country takes over, there will be a dip, and this scenario is a threat.
“Cost control is also a threat, almost like a self-fulfilling prophecy. The mines use a lot of electricity, and coal prices have gone up, so electricity has gone up. The mines use their own commodities, so their whole cost base goes up as their selling prices rise, and this will be a major issue,” he says.
Barnard believes that there will be a period of consolidation in the near future. “It is generally accepted that there will be further consolidation in the mining sector, as the major mining houses seek to diversify their resource base and geographical exposure to commodities.
“It is a race for nonrenewal resources, and the search for high-quality long-life resources is critical to corporate sustainability, and will continue to drive M&A activity,” she says.
Cameron says that exciting times lie ahead for the mining industry.
“There will be some interesting times with mergers and acquisitions, considering that young CEOs seem to have an appetite to conduct major deals. I believe that the mining boom will continue, not going up in leaps and bounds, but with a few more years of much success in the industry, with fewer majors competing,” he concludes. |
