Emerging market demand and supply challenges have created a whole new ball game as mining sector regains sparkle – PwC

The 2010 year resounded with a chorus of optimism from mining industry leaders as the return of demand met market expectations. However, even though emerging market growth has created a surge in demand, the playing field is riddled with supply challenges and permanent cost changes.  

Despite this, the Top 40 is well positioned to take advantage as they collectively have over R6.6 trillion in assets, according to PwC's eighth annual review of global trends in the mining industry – Mine, The game has changed.

The Top 40 announced future capital expenditure programmes of R1 983 billion, some R793.2 billion of which is planned for 2011.

According to Hein Boegman, Africa Mining Leader at PwC, new stakeholders continue to enter the market “with the key objective of securing supply” and they’ve specifically targeted emerging markets.

“CEO’s are continuing to believe in the China growth story and its ability to achieve seven percent growth targets, while governments look at revisiting policies following concern over limited supply and sustainability issues.

Supplying sufficient resources to meet the growing demand is a key challenge for the industry,” says Boegman.

The global financial crisis may have dealt a hard blow to consumer-driven markets, drying up the appetite for demand. The mining sector, on the other hand, has rebounded to the extent that it has outperformed the overall market, with resource-driven demand also added momentum to GDP growth.

Production and commodity prices give that extra boost

Production for 2010 rose by five percent, while copper, gold coal and iron ore reached new average highs in 2010. There was an average price increase of between 26% to 111% during 2010.

“Higher commodity prices and production increases contributed to improved margins and profits in 2010. Revenue increased 32% from 2009, exceeding R2 875 billion, while net profits broke through the R661 billion-barrier after they grew 156%. They are also largely debt free with gearing of just 8%.

With record high commodity prices, top mining companies are looking to add capacity as quickly as possible. But financial discipline and management of costs will be important in 2011, while companies continue to drive their operations to maximise production and returns,” adds Boegman.

According to the report, the Top 40’s cost base has shown a significant increase as lower grade assets and labour shortages take effect, despite benefitting from record high commodity prices.

‘The real challenge is to address ever-rising costs with huge forecast capital expenditure programs when there’s already tight labour and materials supply and growing complexities in operations as sourcing new supply continues to move into more remote and challenging locations.

Vertical integration into mining by customers that prioritise certainty of supply over cost will bring further supply from non-Tier 1 assets.’

Boegman explains: “Mining companies need to demonstrate that they’ve made the right decisions during the global financial crisis to validate that they have the capacity to take advantage of potential upside.”

According to the report, four-year total shareholder return data through 2010 shows ‘impressive’ returns from the mining sector. A number of players took advantage of volatile commodity markets such as copper and silver.

It notably highlights the difference in traditional countries’ returns and that of emerging market producers, the latter of which was more than double of the returns from traditional mining countries’ companies.

From the CEO’s desk

CEOs have been showing a higher level of confidence than that expressed several years ago. If words aren’t enough, their actions will prove this as they have been committing large amounts of capital to fund the expansion of chief mineral regions.

Their continuing belief in emerging markets, particularly the ongoing growth in China – three decades of achieving growth targets. Most point to China as the short-term catalyst for demand.

China’s recently released 12th Five Year Plan highlights a gross domestic product target growth of seven percent and includes large infrastructure spend, such as the construction of a 30 000 km new railway line.

The outlook expressed by industry leaders is increasingly positive, with companies taking definitive action on capital projects, as well as mergers and acquisitions.

“While major players look at acquiring assets, others are looking at other expansion opportunities. However, building new mines and expanding existing ones is a costly process as it’s riddled with inflation, lead times and skills shortages. Companies have started searching for innovative ways to gain a competitive advantage and some have turned to technology as one initiative.

Resource nationalism has been giving CEO’s much food for thought as the topic rises on the agenda. Stakeholder management is also occupying a higher degree of attention from the CEOs.

These are interesting times for the industry and the game plan has certainly changed. Growing demand driven by emerging markets means that supply will become a considerable challenge,” concludes Boegman.