Mining Industry: 2015 Outlook
The mining industry was battle tested in 2014. The prices of iron ore and gold deteriorated, reaching record lows and forcing many companies to cut costs and postpone projects in order to survive. The volatile market forced companies to expand projects in an effort to reclaim profits while others upgraded outdated technology and machinery to improve productivity. It was a rough year to say the least.
"We believe the situation is unlikely to improve in the near to medium term," ANZ’s head of Australian economics, says Justin Fabo, ANZ's head of Australian economics - corporate and commercial.
While the good times for commodity prices may be a thing of the past, there are marginal signs that show otherwise. Prices are slowly moving in the right direction, global operations are starting to regain steam and there’s even speculation of a few block-buster mergers on the horizon.
Will 2015 be any different?
The Future of Gold
Gold dropped to a new four-year low of $1,160 per ounce earlier this month and the downward spiral has many analysts expecting a grim 2015 outlook. The base metal has seen a consistent slide in price, dropping five percent in November and industry experts believe it will fall in the short term to the $1,100 mark.
There is positive news, however. According to IBISWorld research, the price of gold is expected to increase in 2015 to an average of $1,411 per ounce as the global economy improves and inflationary pressures ease with higher interest rates. BISWorld believes 2015 will be the first for revenue growth in the gold sector since 2011.
Despite the increase, gold is expected to decline over the next five years “with higher costs contributing to profit declining to a forecast 7.6 percent of revenue in 2020. It appears gold will settle at around the $1170 mark in 2015. Unfortunately, those prices are well below production costs.
The Future of Iron Ore
Iron ore took a massive beating in 2014. The steel-ingredient, which began declining in 2011, plummeted to double digit territory in May of this year and the outlook in 2015 is not good. Iron ore was one of the weakest commodities in 2014 and the trend is likely to continue.
"Key consumers - Chinese steel mills - still don't seem convinced higher prices are warranted, while high iron ore port stocks and rising seaborne supply remains on offer,” Fabo said.
Analysts believe the precious metal will continue to fall in coming years, reaching its lowest point in 2017 at $70 a ton.
According to IBISWorld Research: "The industry is expected to grow at a slower rate over the next five years through to 2019-20", adding that "iron ore prices (in US dollars) are expected to decline slightly over the five years through 2019-20 [with] this decline expected to stem partly from higher production and output from Australian mines over the next five years."
Many believe the drop in iron ore prices is caused by the rapid increase in supply combined with moderating growth in China’s steel production. Prices have declined nearly 40 percent from $130 a ton in January to $82 a ton in September.
Making the situation worse is the fact China has opened its ports to Valemax size carriers. Built by Vale, the vessels are the largest in the world and designed to carry iron ore from Brazil to around the world. Earlier this year, China Cosco signed a 25 year deal with Vale that involves 14 of the massivevessels.
"The current regulation actually already legitimizes these vessels to berth at Chinese ports. If you look at how the ban was initiated in the first place, it will be unlikely for the government to make an official announcement with much fanfare that says the ban is loosened," an unnamed executive from state-owned port company explained.
"Eventually, the ban will be lifted in a quiet manner. You may see a Valemax ship granted approval by a local maritime authority to dock, and that will be it. Officials realized the ban has hurt China's economic interests, pushing up the costs for iron ore imports.”
Citigroup analysts said the price of iron ore is likely to average around $72 per ton in the first three months of next year before it crumbles into the $60 per ton range in the third quarter of 2015. Goldman Sachs is a little more positive as the company believes the precious metal will hover around the $80 per ton mark.
The Future of Copper
Although demand for copper is steadily increasing, the overall outlook for the metal is bleak. Copper, which is expected moderate growth in the next five years, is past the point of maturity and is now in decline.
"Due to these declining grades the average run of mine (ROM) grades for copper have actually fallen by three quarters to less than one per cent, yet at the same time annual supply increased from under one million tons to more than 16 million tons," BHP CEO Andrew Mackenzie said.
According to IBISWorld research, the Industry revenue for copper is forecast to grow at an annualized rate of 1.5 percent over the next five years to US$7.1 billion in 2019/20".
ANZ head of economics corporate and commercial, Justin Fabo, added that "copper looks vulnerable enough to slip back through the $7000 per ton mark as we approach the normally quiet northern hemisphere summer".
"Operating rates at copper tube and pipe fabricators fell below 80 percent mid-year, an indication that end-user demand is weak; we would be positioned for some further downside in the short-term."
While the slow increase in copper prices may seem like a positive turnaround, in the long-term the metal has no real future. Copper prices are expected to increase moderately before drastically declining in 2017/18. If the industry is lucky, the metal will return to minimal growth in the next period.
Vale invests $150mn to extend life of Manitoba operations
Vale has announced a $150mn CAD investment to extend current mining activities in Thompson, Manitoba by 10 years while aggressive exploration drilling of known orebodies holds the promise of mining well past 2040.
Global energy transition is boosting the market for nickel
The Thompson Mine Expansion is a two-phase project. The announcement represents Phase 1 and includes critical infrastructure such as new ventilation raises and fans, increased backfill capacity and additional power distribution. The changes are forecast to improve current production by 30%.
“This is the largest single investment we have made in our Thompson operations in the past two decades,” said Mark Travers, Executive Vice-President for Base Metals with Vale. “It is significant news for our employees, for the Thompson community and for the Province of Manitoba.
“The global movement to electric vehicles, renewable energies and carbon reduction has shone a welcome spotlight on nickel – positioning the metal we mine as a key contributor to a greener future and boosting world demand. We are proud that Thompson can be part of that future and part of the low carbon solution.”
Vale continues drilling program at Manitoba
Coupled with today’s announcement, Vale is continuing an extensive drilling program to further define known orebodies and search for new mineralization.
“This $150mn investment is just one part of our ambitious Thompson turnaround story. It is an indicator of our confidence in a long future for the Thompson operations,” added Dino Otranto, Chief Operating Officer for Vale’s North Atlantic Base Metals operations.
“Active collaboration between our design team, technical services, USW Local 6166, and our entire Thompson workforce has delivered a safe, efficient and fit-for-purpose plan that will enable us to extract the Thompson nickel resources for many years to come.”
The Thompson orebody was first discovered in 1956 by Vale (then known as Inco) following the adoption of new exploration technology and the largest exploration program to-date in the company’s history. Mining of the Thompson orebody began in 1961.
“We see the lighting of a path forward to a sustainable and prosperous future for Vale Base Metals in Manitoba,” said Gary Annett, General Manager of Vale’s Manitoba Operations.