Australia | Dec 05 2012
-Mining focus turns to production
-Maintenance requirements to rise
-Flexible mining services can benefit
-Expenditure remains relatively strong
By Eva Brocklehurst
There's a renewed focus on costs in the mining sector amid fears of a pullback in expenditure. The industry should nevertheless remain relatively strong, but will enter a new phase. Exploration will take a back seat to ramp-up and production. In this instance, those contractor services which can adapt to the new phase will benefit. BIS Shrapnel, economic forecaster and industry analyst, expects differing growth levels for the investment, production and contractor services segments. Goldman Sachs is not as positive on the outlook for some of the suppliers to mining as the companies are themselves, while Citi notes capital expenditure in mining is softer now compared with the second quarter of 2012 but the outlook for 2013 is for it to rise again.
According to the BIS Shrapnel report, while the mining investment boom in Australia will peak soon and then decline, it will remain at very high levels overall. One man's famine is another man's feast, however, and all this infrastructure will need to be looked after. This is where the companies involved in maintenance and servicing come into their own, although it will not generate great news on the employment front. In BIS Shrapnel's view construction workers associated with the investment boom may be showing up in mining sector statistics, making labour productivity in mining operations look better than it really is. Lower levels of construction and increased productivity through the next five years are forecast to see this measure of employment peak at 315,000 persons by 2016 before a decline.
Recent decisions to bring contract mining services back in-house is driving a dip in activity which will continue over the next few years, according to BIS Shrapnel. Increasing production volumes across a range of commodities will see the value of contract mining rise 20% (to over $12.5 billion) mid-decade from the 2012/13 trough. Maintenance is forecast to rise significantly in real terms over the next five years as miners seek to improve operational efficiencies and lift production. Total maintenance will rise 22% to become a $7.5 billion market. Contract maintenance should pick up substantially from 2014/15, and rise 28% over the five years from 2016/17. BIS Shrapnel believes next five years will be a battle of the balance sheets between miners, suppliers and contractors. The analyst contends that contractors that can be flexible in this environment can expect to see substantial growth in work and revenues over the next five years, although margins will be under pressure.
In terms of exploration, which is triple the levels of the early to mid 2000s, BIS Shrapnel sees this level pegging for much of the next five years, led by oil and gas, iron ore and coking coal. Fixed capital investment has more than trebled over the past five years and here, while investment will start to decline, it will not collapse to pre-boom levels anytime soon given the volume of work underway or committed. The outlook for production is strong, with annual average growth of 7.3% forecast to 2016/17. This will lift mining's share of Australian GDP to 9.1%, making it Australia's second-largest industry sector, according to the analyst. Mining output from Western Australia alone is expected to eclipse Australia's entire manufacturing sector by the early 2020s.
Citi has noted, in its survey of global capital expenditure, that for metals and mining the total 2013 spending outlook has increased by 4% to $169 billion versus the second quarter of 2012. That said, capex per company of $1.1 billion, is down 4% from the second quarter. Citi says the top ten spenders in the sector are down around 3% since the second quarter of 2012.
Goldman Sachs has proffered three views on the outlook for minerals exploration spending, based on where the likes of such operators as Boart Longyear ((BLY)) – drilling services – and ALS ((ALQ)) – laboratory services – believe they are headed, as well as the broker's own view. Boart Longyear has an implied forecast on global exploration spending of around US$16bn, representing a 12% decline year on year, while ALS has an implied forecast of US$15bn, or an 18% decline. Goldman's implied forecast is slightly below ALS at a 20% decline. The most positive scenario is that of Boart Longyear which, in a recent market update, said early indications are that demand has stabilised and revenue growth in 2013 should approximate second half 2012 levels. ALS, in its interim result, is more modest and expects to see a return to growth in its market from late 2013. The least positive outlook is from Goldman Sachs. The broker thinks activity will decline in 2013 relative to second half 2012 levels – without a recovery late in the year. While the two companies don't offer a further outlook, Goldman forecasts a further decline in 2014, around 10%, relative to 2013.
Goldman notes that 2011 was a record year for exploration spending in Australia, at $4.3bn. However, spending in the first nine months of 2012 has also been at a record pace at $3.4bn ($4.5bn annualised) suggesting a new record may be reached this year. Goldman says this is despite comments from Boart Longyear, ALS, and Imdex ((IMD)) – drilling products – that activity has slowed in most parts of the world in the second half. What gives? Goldman says that about 80% of Australian spending is in four commodities: gold, copper, iron ore and coal. Quoting ALS, Goldman says this differs slightly from global minerals exploration where gold and copper are the two key commodities followed by nickel and/or zinc. The difference in commodity mix between Australia and the rest of the world may be a reason for the differing trend in sample flows to the laboratory in Australia at present. Furthermore, Goldman, again quoting ALS, says about 70% of spending in Australia is in brownfield deposits – near existing mine sites. The remaining 30% is in greenfield areas, and this percentage is lower than in most other parts of the world. Hence, these subtle differences may account for some variation in outlook.
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