Mining firms must adapt
The industrial commodities supercycle isn’t over: continued demand from China (slower, but from a larger base), ongoing global urbanisation, and structural factors such as higher energy and extraction costs will continue to support prices in the medium term.
In the pits? Mining and metals firms and the slowing of the supercycle by the Economist Intelligence Unit and sponsored by National Australia Bank, focuses primarily on iron ore, base metals and coal.
The report explains that while cost control has become a new mantra in the industry, driving down capital expenditure overall, some miners are investing counter-cyclically in preparation for an expected upturn. Such expenditure may be necessary as remaining resources are deeper and more costly to extract and will require more investment to prepare firms for the next upsurge in demand. Firms also need to maintain investment in innovation to be competitive.
David Line, the editor of the report says, “Companies face investor pressure to return cash, and with this there’s a risk that spending on innovation will be cut. This would be a mistake. It will hurt long- term profits, since resources are becoming more costly to extract. In short, those that innovate ‘from pit to port’ will be the ones with a competitive advantage.”
The report also asserts that the era of the mining megadeal is over, as large-scale consolidation becomes difficult for financial and political reasons. However, the industry can expect to see deals among junior and mid-cap firms that need to shore up their balance sheets or find partners for projects they are no longer able to finance on their own. Meanwhile, major mining groups are diversifying into ‘mid-cycle’ commodities, demand for which will be driven by urban populations’ insatiable demand for manufactured goods, energy and food.