Spending cuts in Australian mining: Which suppliers will be hardest hit?

A new Timetric survey finds that 30% of Australian mine and procurement managers expect to cut back spending on plant and heavy equipment over the remainder of 2014 and early 2015. This share is higher than in other areas of purchasing, such as parts, maintenance and consumables. For example, only 16% anticipate a reduction in explosives, blasting and chemicals, and 19% for equipment consumables. This is also balanced by 20% expecting to increase expenditures on explosives, blasting and chemicals and 19% on equipment consumables. The results demonstrate both the downturn in the Australian mining industry, and also the movement from an expansion phase into a production phase.

The survey results also show that respondents from larger companies are most likely to cut spending on plant and heavy equipment. Some 47% of respondents from companies with revenues above US$10 billion, and 41% of those with revenues between US$1-10 billion expect to reduce spending on plant and heavy equipment. These two groups of companies include the likes of BHP Billiton, Rio Tinto, Glencore Xstrata and Peabody Energy. As these companies typically have multiple mines within their portfolios, they are able to ramp up and down different operations based on market conditions.

These bigger companies, many of which are coal producers, have been hit particularly hard by the downturn in commodity prices. However, unlike their smaller peers with revenue below US$1 billion and typically single-mine companies, they can close, and have been closing, unprofitable mines, or sections of mines. This would explain that more respondents from big companies predict decreased expenditure across all areas, including areas such as equipment consumables, which are a production-phase expenditure.

The downturn in expenditure on plant and heavy equipment will also affect the number of supplier relationships each company has. Overall, 23% of respondents expect a reduction in the number of supplier relationships for plant and heavy equipment from the first quarter 2014 to the first quarter 2015, with this percentage rising to 40% for respondents from companies with revenue above US$10 billion. In contrast over 80% of all respondents predict that the number of supplier relationship will stay steady or increase for purchasing explosives, blasting materials and chemicals.

Cliff Smee, lead analyst at Timetric says: “For suppliers to the mining sector, the greatest threats to their business come from the two largest customer segments: tier 1 and tier 2 mining companies. Suppliers to these companies need to ensure they are part of their clients’ long term plans for supplier rationalisation, and ideally expand their products and services to suit the production phase of the current mining cycle.”