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Four key challenges ahead for the Australian mining sector

While the mining sector has experienced tough times it seems there are calmer waters ahead, according to trade credit insurer Atradius.

Mark Hoppe, Managing Director ANZ, Atradius, said, “Australia is one of the world’s leading mineral resources nations, ranking in the top two to five countries in the world, depending on the commodity. 2014 saw the peak of the revival in the Australian mining industry.

“The main driver for this revival was the rapid urbanisation and industrialisation of emerging economies in Asia, especially China, which dramatically transformed global commodity markets during the 2000s.”

In this period, a strong demand for resources propelled commodity prices to record levels, supporting the rapid expansion of global energy and minerals supply. The initial surge in resources investment was driven by coal and iron ore projects, largely to meet the demand for steel in China. China rapidly became Australia’s largest export partner by far and commodities dominate the rankings of main export sources. China consumes about 47 percent of the world’s base metals (up from 13 percent in 2000) and is the world’s largest importer of iron ore, coal, copper, bauxite, and nickel. The main consumers of Australia’s major commodities are Chinese steel mills or power plants.

Mark Hoppe said, “Since its peak in 2014, mining has had its struggles but is now showing more positive signs. However, mining operations need to be aware of and prepared to face a number of key challenges in the coming months and years.”

Atradius has identified four key challenges facing the mining sector:

1. Rebalancing of supply and demand. The iron ore commodity rush dragged the major miners Rio Tinto and BHP (number two and three in the world) upwards and, in turn, created a more suitable market for players like Fortescue and Gina Rinehart’s Roy Hill project to peg high debt against high returns and make their relatively new company viable. The good times were expected to last forever but the downturn, as well the relatively short period in which the price dropped, surprised everybody. This made it more challenging to make a strong business case, especially for organisations focusing on one commodity like Fortescue. In the next five years analysts and the government expect the iron price to stabilise. This will make income and returns far more predictable. Businesses will be able to better plan for costs making lending to, and investing into, mining companies attractive again.

2. High profile casualties. Pluton Resources, Convergent Minerals, and Kimberly Diamonds going into receivership, while Queensland Nickel was placed into administration in January 2016 and Peabody Energy filed for Chapter 11 bankruptcy protection in April 2016. These high profile causalities occurred because of high inflexible company costs based on the expectation of commodity prices staying high. When commodity prices dropped they were unable to adjust quickly enough. Going forward we expect to see fewer well-established mining companies going into administration.

3. Uncertainties about the Chinese government’s strategy. The urbanisation of China has driven steel consumption in construction and infrastructure. The Chinese Government has committed to reducing their steelmaking capacity domestically. However, they have also announced plans to build a brand new city called Xionhan New Area which will be twice the size of New York City, almost 2000 square kilometres. So uncertainty surrounds where China will source steel and raw materials (iron ore and coal) for their new city. Will it be domestically or internationally? This decision will impact mining companies in Australia.

4. Focus on costs. Flat price forecasts have meant we’re starting to see listed miners publicly state their intent to drive down costs and debt, like Fortescue. We also expect more junior mining and exploration companies to stop exploring if they’re unable to produce a viable business case and find a reliable provider of cash or funding. Suppliers like BHP and Rio, with world-class assets, the scale of production, efficiency and low costs can afford speculative exploration. There’s also the potential for successful junior miners to be targeted in mergers and acquisitions.

Mark Hoppe said, “Mining operations and those looking to do business with miners should be aware of the coming challenges so they can develop a strategy to overcome them and continue to trade confidently.”

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