Author: yinghui

Following our analysis of the super commodity cycle and the conclusion that commodity prices should stay low or continue to fall for the next 15 years, this article looks at the future.

It looks likely that the recent fall in commodity prices may be one of the biggest ever on record. The fall may even match the 66% implosion experienced between 1917 and 1931.

One fact in every supper commodity cycle is that every rise in commodity prices is followed by oversupply. This oversupply continues for years as companies battle it out in a dangerous game of survival to cut production and costs.

Remember the oil crisis in the 1970s? The current oil price is lower than it was in 1981 as there is just too much oil production. Oil producers are still pumping like crazy to maintain “market share” and their biggest enemy is other oil producers, not their customers. Witness the warm feeling Iran has towards the West and Saudi Arabia proxy wars on Iran.

Do you remember the shortages of steel, iron ore and a host of other materials such as lumber and rubber? Neither does the rest of the world. In the case of steel, depressed prices flow from massive overproduction of the magnitude that the world can rebuild its infrastructure over the next decade with the current iron ore supply.

Steel prices have also not hit rock bottom yet as more supply is on the way and iron ore prices have fallen by two thirds.

Consumers, on the other hand, have fat years ahead of them as the prices of wheat, corn, oats and meat are at their lowest levels ever in real terms – the cheapest in real terms. We have more than 750 years of wheat price data and it shows that wheat prices at the end of 2015 were in fact 6% cheaper than at the end of 1973 in nominal dollar terms.

Simply put, the world has too much food such as maize and wheat. Beef and chicken prices are dropping in USD terms too. I guess that by the end of the low commodity cycle consumers in advanced countries will spend less than 5% of income on food and in some cases more on eating out.

The effects on emerging market economies like South Africa will be huge if history repeats itself and the world enters a period of another 15 years of low prices for our commodity exports. That takes us back to when we had to watch the current account balance like hawks.

I will stick my neck out and make the prediction that most of the falls are behind us, but commodity prices have another 30% to fall from in real terms but it could be that prices must fall another 20% before we hit rock bottom.

The world changes in this part of the cycle.

Remember the hyper or high inflation in Germany in the 1920s and ’30s and the depressed prices in places such as the US and the UK at the time?

Something similar is happening today. Brazil and Russia have double-digit inflation and Venezuela may have inflation higher than 100%.

Growth in Europe and the US is picking up but many have deflation such as Switzerland or very low inflation such as the Eurozone and the US. Japan too has very low inflation.

The realignment of currencies is probably the biggest difference between the Great Depression world and current weak growth. Currencies are acting as buffers for commodity exports and as further deflationary anchors for the developed world and China.

Rising unemployment in Brazil, Russia, Saudi Arabia and of course Africa will also have significant political implications. Add the lower growth outlook to the Middle East and Africa and those two continents will again start falling back along with much of Latin America. This in turn will allow increased inequality between rich and poor countries.

Not only will these countries suffer lower income from commodities but their interest rates and inflation will be higher. The impact will also be visible in their current account and government fiscal balances will remain under pressure.

Just like any perfect storm these countries will also see ratings downgrades. Generally these are the parts of the world where population growth is still higher than the average and that also indicates that the richer world will see migration from these countries continue.

This will not be a once off situation but will continue well into the first part of the next commodity upswing so expect Europe and North America to continue to see high numbers of refugees and migrants. Perhaps Japan, China and Thailand will also see migration to their countries.

This will continue well into the 2030s and will have big impacts on housing; religion and social cohesion in the receiving countries. The brain drain of the developing world will unfortunately continue but over time tourism and remittances will grow strongly as well as some exports of local favourites (Mrs Balls Chutney comes to mind.)

The big man syndrome along with Dutch disease will be off the radar for the next two decades and poor countries will get out of mining and other services to mining. We will see privatisation make a very big comeback in most African and Middle Eastern countries as budget holes enforce sales. Africa will become much more of a friendly investment destination as countries implore companies to invest.

The rich world will evolve into the next evolution in economic terms with renewable energy, energy storage and new services. Countries who are dependant on commodity exports will have to find new ways to attract wealth and to create jobs. It will have to change to allow for the delivery of more value-added services such as tourism, call centres and probably even high-end personal services to the richer world.

Commodity companies will change
Importantly however is that another 15 years of low commodity prices would also ensure the metamorphoses of commodity and agriculture companies.

These companies will employ fewer workers and will become much more mechanised and automated.

The companies will grow larger and larger to make use of economies of scale and they will innovate to develop new mining methods and concentrate their effort in countries where barriers to operations are lower. They will become more important for commodity countries to attract and that will be their main strength for the next two decades. The bigger companies will take over state-owned companies and increase productivity and bring modern management methods to play.

Agriculture will also go big and in contrast to the mining sector, there will be room for small niche farms such as the production of organic produce.

The small farmer will be the specialist, the generalist will be massive!

Doosan has developed a new range of severe duty buckets for crawler excavators.

The buckets are designed for operators who need buckets that can work in abrasive materials in heavy digging and loading applications.

The buckets are approved for use with Doosan’s DX140LC-5 through to its DX530LC-5 crawler excavators.

They are available in both pin-on and wedge-lock style.

According to Doosan, its severe duty buckets are available in sizes ranging from 45 centimetres to 1.82 metres for larger Doosan excavators.

The buckets have been built with abrasive resistant materials for increased protection when digging in loose rocks, open pit, or quarry operations, with the side cutters, shell bottoms, side wear plates, and weld-on shroud also built from the similar material.

Reinforcing gussets have been added to increase the strength of machine fitting joint on the bucket.

Front wear pads have been included to provide extra protection from rocks and other materials.

An abrasive wear strap also comes as standard.

The start to 2016 for the mining and METS sectors has been a disappointing one.

Whilst iron ore has temporarily risen in price, it is forecast to drop back down to around $US30 per tonne, and another smaller iron ore player, Gindalbie Metals, has been abandoned by parent company Ansteel and currently hovers in uncertainty about the future of its Karara Project.

Some of Austmine’s directors took time out to share their thoughts on 2016, what it holds for the industry and what can be done about it.

Alexander Kachellek, managing director of Korvest and chair of Austmine, gave a shrewd evaluation of what is to come in 2016:

“Miners and METS companies need to be able to continue as they are for, I believe, the next 2 years with the current tumultuous business conditions. Businesses need to focus on strategies, then action plans, that include things like Kaizen that makes the business fitter and ready for an upswing.

“Remember, ‘if it is down, then it will go up and if it is up, it will go down’; we just do not know the length of downs and ups!”

Ian Gibbs, executive general manager – mining of RCR Resources provided some excellent insights and advice:

“The METS sector is facing one of the toughest periods in history, with 2016 being defined by weak domestic opportunities. (Certainly the worst I have seen in nearly 40 years in the industry). Many projects have been delayed and the outlook appears these will remain on hold for the most part of the year,” Gibbs said.

“Both coal and iron ore sectors do not forecast rapid improvement, certainly in the first half of the year. Many companies will face the challenges of restructuring to prepare for the future, leaner and with improved effectiveness.

“My thoughts are, our opportunities lie in improving our efficiency as suppliers, restructuring our offering to clients and providing real cost saving solutions by innovation. This may include new technologies, but also new ways in engaging with clients in service and support.

“However offshore opportunities will present with the weaker Australian dollar and I have already witnessed our competitiveness has dramatically improved, which should unlock many opportunities, for Austmine members,” he said.

“Apart from the obvious measures to reduce costs Australian companies will need to be very nimble, seize the opportunities presented and looking a new ways to do things.”

Rob Simpson, manager for infrastructure and environment at Xenith Consulting and deputy chair of Austmine concurred with Gibbs, emphasising the need for diversifying in METS:

“Whilst 2015 was one of the toughest years in recent history for the mining and METS sectors, 2016 has started with even more uncertainty. The forecast weakening Australian dollar and late 2016 recover of the oil price provides some light, however subdued investment throughout the industry will continue, as will financial pressures on many organisations,” Simpson said.

“Retaining existing clients whilst broadening service, geographic and/or customer base; as opposed to even further, unsustainable cost cutting and market shrinkage; is critical for METS companies sustainability over the next 12 months.”

Max Wijasuriya, vice president for capital equipment at Metso Australia made some excellent observations on the opportunities and need for innovation provided by these challenging market conditions. He took a positive approach to how organisations need to tackle this new market norm:

“The challenges will certainly be there in 2016 with the volatility around the world markets and uncertainty around commodity prices. What seems to be changing though, is the opportunity for innovation, to do things differently – something which has always been there, but where the take-up of these ideas was quite low (or took too long) in the past, due to the focus on proven production sometimes seemingly at any cost,” Wijasuriya said.

“More and more now we’re seeing that mining companies and suppliers are challenging themselves to do things differently, and that’s not just around new technology and innovation, but also in new ways of approaching a problem or issue, and (cautiously) embracing these ideas if they work. For the METS industry, it is about how they can add value to their customers – and this is happening more than ever before. This ties in very well with Metso with their innovation and technology initiatives, as well as strategic partnership/development projects with key customers.

“METS companies need to find more than ever before ways to add value, whether through technology, innovation, or different problem-solving approaches, etc. The need to maximise profit and improve efficiency has never been more important with less to go around given the challenging times – but mining will continue to remain a critical business worldwide; it’s just that some of what is being focused on may change and progress.

“What was important before will remain important, but other areas and ways of thinking will come to the fore – a positive development.”

Alan Broome, chairman emeritus of Austmine and chairman of Micromine and Hedweld, two Austmine member companies, offered his insights into the reality of the next 12 months for miners and METS here in Australia:

“This year is going to be very tough for Mining and METS,” he said.

“The latest Macquarie Bank commodities forecast is very gloomy, reflecting the current and immediate future state of our sector. My opinion is that a lot of Mining Companies will go out of business and a huge number of assets will be put up for sale at bargain prices. The flow on to METS will be significant and unless they can adjust, they will falter.

My view is that many METS businesses are not equipped to adjust quickly enough to the changing market demand and circumstance. They will need to be very focussed on ‘adjustment strategies’ rather than “more of the same”. I’m not sure that this is widely appreciated as yet. Every company needs to have its own adjustment strategy; there can be no one fits all approach. This state of the market is not a flash in the pan; it has been with us for quite some time and will continue for a fair while yet, so you can’t just hold your breath and hope it goes away.

“The places to be are South America, particularly Chile and Peru, and the emerging markets in Central Asia and Russia. The commodities most likely to provide opportunities are nickel and copper because they have good medium term prospects, but frankly at the moment everything’s quite depressed.”

Peter Seligman, managing director of SRO Technology, an SME METS business provided commentary and advice based on his own position in the industry, facing these challenging times:

“The last few years all the miners have been chasing their cost curve. Their products have been getting cheaper, so they either had to get more productive or cut the costs of their operations. More often than not, they’ve been focusing on getting cheaper, rather than more productive. We’ve seen this with them cutting their workforce, spending less on maintenance and investing in less capital expenditure.

“Last year, David Moult, MD and CEO of Centennial Coal talked about the 3 waves of the downturn (a concept borrowed from Kirby Johnson, Consulting Partner at Wipro) and improving efficiency,” he said.

“Firstly you cut costs, secondly you sweat your assets and thirdly is the re-engineering phase, where you begin to spend money once again on making your assets more productive. That third wave is the huge opportunity for METS – but who knows when it’s going to happen? It might be 2016, it might not be. However, it does have to be relatively soon, because there’s no more cost the miners can cut. They will need to start spending money, in order to save any more on costs.

The opportunity for METS, in my opinion, lies in METS taking responsibility for kicking off that third wave. What can they do to get their hands dirty to demonstrate that miners can, and should, initiate that third wave?

“METS need to get pilots up and running, or demonstrate the cost savings of their technology, rather than just explaining it. I know that costs money, and most METS are small businesses like mine, and it means you have to invest hard cash, but sometimes you can find a customer who is willing to help you fund a pilot in an innovative way if they feel it may save them some money in the future! The challenge as I see it is that people are standing on the sidelines, rather than risking getting involved in these projects that could help reduce costs for the industry or their operations.”

Austmine CEO, Christine Gibbs Stewart shared her thoughts on what METS can do to stay strong and competitive during the year to come:

“As noted by our Directors, and evident in the commodity prices, news and forecasts, 2016 is going to be another challenging year for the METS sector. We can either be defeated and go nowhere, or rise to the challenge and look at new ways of doing things, explore new opportunities, develop new relationships and importantly – innovate.”

Nyrstar has announced the formal launch of the sales process for all its mining assets.

These mining assets include operating mines in Canada, the U.S., Peru, Chile, Mexico and Honduras.

“Nyrstar has received a number of unsolicited expressions of interest for its mining assets from various potential buyers and will seek to engage with all prospective buyers for the mining assets, individually and as a portfolio, to ensure a fair and transparent sales process,” it said in a company statement.

The process will be carried out over a period of seven months.

It is unknown how this will affect its refinery operations, particularly those in Hobart and Port Pirie.（给其提供过实验室破碎机和齿板）

However, late last year the company signed a pledge to invest in its Tasmanian smelter, which followed on the back of an Australian stepping into the CEO role.

The company signed a binding agreement for a $52 million investment at the Hobart smelter.

The funding is used for four growth projects at the site, two of which are focused on increasing its capacity to treat more complex concentrates.

This agreement was modelled on a similar agreement struck between Nyrstar and the South Australian Government, where the two agreed to a $563 million redevelopment of the Port Pirie smelter to an advanced multi-metals processing and recovery facility.

Gindalbie Metals has hit a roadblock with the withdrawal of funding by joint venture parent Ansteel.

The WA miner announced last week it would voluntarily halt trading after it was informed by Ansteel, owner of the controlling share (52.16 per cent), that it would be “unable to continue providing funding support to Karara due to the impact of economic and industry downturn”.

Gindalbie is a JV owner of the Karara Project, located 200 kilometres east of Geraldton, which employs a workforce of around 1000, jobs that have been thrown into jeopardy by funding withdrawal.

The company is expected to make an announcement prior to commencement of trading on Tuesday 12 January.

The West Australian reported that the subsidiary operator Karara Mining has lobbied the WA government for royalty and tax concessions, in the effort to cut $200 million from operating costs to break even at current iron ore prices.

Last month Karara CEO Zhang Zhao Yuan met with mine and finance minister Bill Marmion and Department of State Development director-general Stephen Wood.

In early December Gindalbie chairman Keith Jones said it would be more costly to close the mine than to operate, which it would continue to do as long as Ansteel was prepared to subsidise losses.

It is understood Karara Mining is locked into high haulage costs due to take-or-pay agreements made with Brookfield rail during the mining boom.

Karara has already benefited from $9.3 million in temporary royalty concessions in the form of a 50 per cent rebate over 12 months to last September.

Last May Karara consolidated $US1.48 worth of loans into a single facility, with the maturity date moved to 2030.

Ansteel’s involvement with Karara originally began as a means to directly source material for its steel making operation at Bayuquan near the port of Yingkou.

Iron ore is trading around $US41.40 per tonne, compared to $US120 in 2011 when the Karara mine began operations.

In FY2014 the Karara mine produced nearly 2.4 million tonnes of concentrate from 5.853 million tonnes of magnetite ore.

Ausenco has been awarded a number of coal processing plant contracts and work in Africa.

It is currently finalising the terms for the upgrade of a CHHP flotation module, at an unnamed NSW coal operation, worth approximately $17 million.

The EPC project includes the design, supply, construction, and commissioning of the flotation module, as well as modifications to parts of the existing CHPP to support the upgrade.

Work is slated to begin this month, and take around 12 months to complete.

Ausenco has also been awarded a $15 million, three year ‘Optimise phase’ contract to provide operation and maintenance services for the CHPP at the Isaac Plains coal mine.

The contract will run for three years.

On top of these Australian wins, Ausenco has also been awarded work in Africa, working on a six month ‘Optimise phase’ extension of works at Vale’s Moatize CHPP in Mozambique.

Kramer Ausneco has also seen strong growth in PNG.

Undersea mining has made a leap forward with the development and testing of a new machine in the UK.

Proactive Investors flagged the announcement from Specialist Machine Developments, a UK company that was acquired last year by a subsidiary of China’s CRRC Zhouzhou Institute.

Land-based testing of the 310 tonne deep sea ore harvester was recently completed in Newcastle.

Details are sketchy, but the new machine was touted as the world’s most powerful to date, boasting two megawatts of power and capacity for underwater oil and gas, trenching and cable laying applications.

The equipment is designed to be used in conjunction with a cutting machine and collecting machine to engage in mining activities.

A new survey is forecasting a growth in equipment related technology by Australian miners in the next two years.

The latest Timetric Mining Intelligence Centre survey predicts a boom in safety, maintenance, and productivity related technology.

“A substantial share of Australian mines have already invested in environmental monitoring, fleet management and predictive maintenance technologies, with tyre monitoring, collision avoidance and remote control/machine automation to be the key areas for future investment,” Timetric stated.

The group surveyed 100 mine managers and other decision makers across operating Australian mines late last year, asking respondents to identify which of 12 different mine site technologies they have invested, and will invest, into.

These technologies included fleet management, environmental monitoring, energy management, and collision avoidance technology, as well as drones and wearable technology.

“The results show the highest share of respondents (88 per cent) have invested in environmental management technologies, followed by an assembly of technologies focused around the vehicles and mobile equipment on a mine site,” Timetric said.

“Five other technologies in which more than 80 per cent of respondents’ have invested are fleet management (85 per cent), predictive maintenance (85 per cent), tyre monitoring (83 per cent), scheduling and shift optimisation (81 per cent) and collision avoidance technologies (80 per cent).”

The respondents also pointed to a greater focus in vehicle technology.

“Over the coming two years, significant shares of those yet to invest are expected to make investments in tyre monitoring (53 per cent of those yet to invest), collision avoidance and proximity detection (50 per cent), and remote control and machine automation technologies with 48 per cent,” Timetric said.

“In total over the next two years, 92 per cent of mines are expected to have tyre monitoring technology implemented, some 90 per cent will have collision avoidance technologies and 77 per cent will have implemented remote control and machine automation on site.”

Commenting on the results, Timetric senior analyst, Nez Guevara, said “the results show the Australian mining industry recognises environmental accountability, social responsibility and commercial success are not inseparable.

“Monitoring the sustainability of a mine operation covers its entire life cycle, from exploration and feasibility, to decommissioning and closure.

“The speed at which companies can adapt to become more efficient is crucial for success in an industry that now maintains a tight grip on capital and operational expenses. This is more of a necessity at present, as low commodity prices affect the industry globally,” he said.

“Improvements in technology can change the way companies view mineral deposits, improve operational safety and manage overall costs.”