A recent PwC report reveals that 2017 was an astonishingly good year for mining companies, with a market cap of $926bn up 30% from the previous year. Molly Lempriere explores what’s behind this growth and considers what it can tell us about the decade ahead
2017: the best year yet for mining?
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Every year, PwC releases a report looking into the 40 biggest mining companies’ growth and profits to provide a general assessment of the industry for the previous year. In the past few years, this has been unsurprisingly bleak, as while commodity prices crashed so too did profits and companies turned to money-saving initiatives.
Things are finally on the up though, according to PwC’s Mine 2018 report, optimistically titled ‘Tempting Times’. It examines the greatly improved results mining companies experienced in 2017, raking in combined revenue of $600bn, 23% more than the previous year.
“It’s been a fantastic year, and pretty much demonstrates that the industry has turned the corner from where we were,” says PwC UK mining leader Jason Burkitt. “Overall, there were pretty good results around other things as well, like safety and diversity. I have to say a pretty good set of results for the industry as a whole.”
What’s behind this sudden change of fortunes and can it continue?
The commodities crash
Following the commodity boom in the early 2000s, prices crashed to the lowest level since the 2015 financial crash. One of the most commonly quoted reasons for this downturn was China’s influence on demand.
China’s rapid growth at the beginning of the century led to a super-cycle of commodities. The country imported huge quantities of commodities, such as iron ore and coal, as it industrialised at a speed previously unseen anywhere. In 2000, China consumed 12% of the world’s commodities, which by 2015 had risen to 50%. This situation could not last forever though, and as it slowed down it turned to focus on more sustainable and environmentally friendly methods of growth.
Coupled with this downturn in demand, the world faced an oversupply of many commodities, as mining operations had grown sharply on the back of Chinese demand. Global supplies of aluminium, for example, rose by 10.3% in the first half of 2015 despite weak demand. This glut led to prices dropping to a six-year low.
Over the last few years, initiatives have been undertaken by miners worldwide to lower capex and production costs, in order to reduce the oversupply and still turn a profit. Many of these cost-saving initiatives have been very successful, playing a role in the recovery of the sector.
“It’s been a feature for the last four or five years, there's been a lot more cost discipline,” says Burkitt. “Mining companies have changed their overall strategies and rather than trying to produce more tonnes they're trying to produce profitably. You kind of expect that as we move on those processes decreasing.
“I think what's good to see at the moment, is that although profits are increasing and so there's an incentive to produce more, we're not seeing wholesale increases in production, as I said it was relatively flat. I think it's maintaining that cost discipline when things get good, that being said, we're seeing inflation creep in.”
China’s rapid growth at the beginning of the century led to a super-cycle of commodities
In order to foster this recovery in the commodities sector, capex has been lowered for
Mining industry on the up
‘Tempting Times’ provides encouragement that the sector is once again growing, having already hit rock bottom. “It follows the commodity price increases that we've had over the last eighteen months, we had a suspicion that we'd hit the bottom 18 months ago,” says Burkitt. “But now with these results we can see the cashflows, it hasn't surprised us that mining companies are doing much better.”
This can be seen in a number of different metrics within the report, which examines not just profit but capex among other measurements. “You can see that in how the market cap has gone up in most of the industry,” says Burkitt. “It's up 30%, revenue was at $600bn so that's up 23%, and ultimately earnings which are expressed by EBIT was up even more at 38%.”
In order to foster this recovery in the commodities sector, capex has been lowered for many projects and production has been cut. This was necessary for the industry to work through gluts of metal and minerals, allowing prices to recover.
“The other thing that's encouraging is that it's the first time in five years that we've done it that we haven't seen declining capital expenditure,” says Burkitt. “If you can imagine, four or five years ago the industry was spending about $130bn-$140bn a year on new projects.
“Last year that had gone all the way down to just under $50bn, and this year it hasn't dropped again, it's stayed at $50bn. That tells us that some new projects are being commissioned, so what we understand and the report confirms for us is that we're at that turning point, that industry is now growing again. Albeit slightly, but that's an important trend change.”
While the economics improved, so did other aspects of the industry. In the 28 companies that provided statistics, fatalities had fallen from 161 in 2016 to 102 in 2017; and of the 22 that reported on injuries, 15 saw improvements.
The uncertainty has affected commodity prices; in particular steel after the US proposed a 25% tariff
Is investment too tempting?
Last year’s results should bring optimism to the sector; after the last few tough years the light at the end of the tunnel seems to finally be within sight. This is something Burkitt agrees with.
“Generally speaking, we think there will be good GDP growth,” he says. “We also think that for miners it's quite a good time because with that lower investment it means that there is going to be in some commodities a greater shortage of those commodities. Therefore, that's an environment that leads to higher prices from the mining company’s perspective.”
These commodities are greatly linked with developments in green technologies, such as batteries. Commodities including lithium and cobalt have seen phenomenal growth recently due to the adoption of electric vehicles. Demand for lithium carbonate equivalent is predicted to hit 422,614 metric tons (mt) by 2025, up from 234,788mt in 2017.
The success of the commodity sector is by no means certain, however. “This comes back to our heading of ‘Tempting Times’, there are a lot of things that could disrupt that. So if you look at the political uncertainty due to tariffs, the political uncertainty due to sanctions, the nationalistic tendencies of some of the governments in terms of local participation in mining, nationalisation of companies, local ownership, changing tax and investment treaties, etc.
“All of those things mean that actually it’s quite a difficult world to navigate and despite there being potentially good GDP growth on the horizon you have to temper that with, well if there's a trade war, anything could happen.”
Already the uncertainty has affected commodity prices, in particular steel after the US proposed a 25% tariff. In order to ensure the prosperity of the commodity sector in coming years, companies and the government need to work to ease uncertainty, continue to minimise capex and ensure production is in line with demand.
“Governments need to be mindful that it's a long-term investment and miners have a certain risk appetite but they need to be confident that they'll be able to make an appropriate return for the risk that they're taking,” says Burkitt.
“Obviously, consumers around the world don't want to be paying more for their products ultimately, and unfortunately, if you start bringing in tariffs and protectionism that does disrupt global trade very heavily and can lead to high prices and disruption.”
The uncertainty has affected commodity prices, in particular steel after the US proposed a 25% tariff