Business Monitor International (BMI) believes “further consolidation in the mining industry will act as a headwind for the mine servicing sector in 2014, eroding pricing power for many large firms. Nonetheless, a bright spot for mine service firms is that mined volumes, particularly for coal and iron ore, will continue to increase in absolute terms despite a slower rate of growth. The ongoing economic recovery in the US and a weakening yen should also provide some more specific respite for mining suppliers.
“We believe the current downturn in the mining industry will keep mine s ervice and equipment makers under pressure in 2014. Despite the raft of earnings downgrades over the pas t quarters , our downbeat macro view on China continues to suggest that the pain in the mining servicing industry is far from over. We forecast Chines e real GDP growth of 7.1% in 2014 compared to 7.5% in 2013, before s lowing further to average 6.1% over the next five years.
“Notwithstanding other supply factors at play, the economic s lowdown in China will be a significant drag on commodity prices as demand growth from the world’s larges t consumer of industrial metals takes a hit. Miners across the board will continue to recalibrate their investment approach by embracing cost-containment and capital efficiency, in contras t to the headlong pursuit of volume growth. The growing ris k avers ion of mine financing from both the debt and equity markets would further limit the ability of miners to carry out their projects and ultimately drive consolidation in the industry.
“According to Bloomberg, the capital expenditure (capex) of the top 10 miners, which accounts for 80% of industry spending, plunged by 16.9% year-on-year (y-o-y) in 2013. This is expected to be followed by y-o-y falls of 9.2% and 12.1% in 2014 and 2015, respectively.
“As a growing number of marginal projects s ink underwater, mining suppliers will suffer from further weakness in order books and be forced to trim the prices of their equipment and services over the coming quarters.
“Mining suppliers operating in the US coal market will remain gripped by challenges over the medium term. Coal mining states such as Wes t Virginia and Kentucky are battling with huge job losses as a result of the rise of cheap natural gas and the escalating war on coal pollution. The Environmental Protection Agency (EPA) has proposed rules that effectively eliminate the construction of new coal-fired power plants , while domes tic power companies have formalised plans to permanently retire around 28,000 MW of coal-fired generating capacity over the next decade. According to the Energy Information Administration (EIA), US coal production reached 922 Mt in 2012, the lowest level in almost two decades
“Nonetheless, it is certainly not all gloomy in the mining servicing industry. We believe mining suppliers (represented by the Bloomberg World Mining & Construction Index) will continue to outperform the mining complex (represented by the Bloomberg World Mining Index) over the coming quarters.
“This outperformance will be due to two key reasons . Firs t, of paramount significance to many mine service and equipment providers , mined tonnage will continue to increase in absolute terms despite the pullback in supply growth. This is particularly the case for bulk minerals such as coal and iron ore that are especially dependent on support from the heavy industry. Greater mined volumes should underpin continued demand for construction equipment and mining services over the long term.
“Second, in contras t to the miners , suppliers of mining equipment generally enjoy quicker cashflow as they are often paid at leas t partially upfront upon the granting of work contracts . Mining companies , however, require years or even decades in some instances before they are able to realise cashflow from production.
“More generally, our constructive view on the US economy should also cast a much-needed lifeline for equipment makers. Fixed investment in the US is s et to expand at a relatively robust pace over the coming years , as the cyclical components of the economy – residential construction, business investment and consumer durables purchases – remain at historically low levels relative to the size of the economy.
“As demand from the construction industry continues to improve, this should support growth in equipment sales while s lowing down the growth of rental equipment. Rental growth has significantly exceeded equipment purchases in recent years as a result of economic uncertainty and a secular shift towards rental. Compact equipment and aerial work platforms (AWPs ) are key rental equipment types.”
