Key Mining Themes: Europe

BMI View: We forecast limited opportunities in Europe's mining sector due to high levels of public opposition and increasingly stringent environmental regulation within the sector. Bright spots will be in coal production in the east, where Russia, Kazakhstan and Turkey increase production to cater for both domestic needs and export demand. Originally promising mining sector growth in the Nordics is now likely to be more moderate as lower commodity prices squeeze companies' profit margins. We anticipate the mining of rare earths to become a bright-spot in the long term as Russia and potentially Greenland forge ahead with investment into the sector.

1. Coal Production Growth Mainly In The East, But Upside In Germany

Europe's coal sector is set for two distinct paths. In the East, specifically in Russia, Kazakhstan, Turkey and Ukraine, we expect solid growth in coal production as substantial reserves come online in response to growing Asian demand. In Kazakhstan particularly, there is huge potential for coal production as much of the country remains unexplored and the government is eager to attract investment. However, downside risks lurk especially for Eastern European coal production. International institutions including the IMF and World Bank recently followed the lead of the US government in restricting funding of coal-fired power plants except in rare circumstances for environmental reasons. This will have a knock-on effect on the coal mining industries of countries including Ukraine, which depend on supranational funding for their coal-fired power plants.

Looking East For Growth
Select Countries - Coal Production % Growth y-o-y

BMI View: We forecast limited opportunities in Europe's mining sector due to high levels of public opposition and increasingly stringent environmental regulation within the sector. Bright spots will be in coal production in the east, where Russia, Kazakhstan and Turkey increase production to cater for both domestic needs and export demand. Originally promising mining sector growth in the Nordics is now likely to be more moderate as lower commodity prices squeeze companies' profit margins. We anticipate the mining of rare earths to become a bright-spot in the long term as Russia and potentially Greenland forge ahead with investment into the sector.

1. Coal Production Growth Mainly In The East, But Upside In Germany

Europe's coal sector is set for two distinct paths. In the East, specifically in Russia, Kazakhstan, Turkey and Ukraine, we expect solid growth in coal production as substantial reserves come online in response to growing Asian demand. In Kazakhstan particularly, there is huge potential for coal production as much of the country remains unexplored and the government is eager to attract investment. However, downside risks lurk especially for Eastern European coal production. International institutions including the IMF and World Bank recently followed the lead of the US government in restricting funding of coal-fired power plants except in rare circumstances for environmental reasons. This will have a knock-on effect on the coal mining industries of countries including Ukraine, which depend on supranational funding for their coal-fired power plants.

Looking East For Growth
Select Countries - Coal Production % Growth y-o-y

In Western Europe, we expect coal output to continue its downward trajectory as increasingly depleted mines push up cash costs while the market is simultaneously flooded with cheap coal imports from the USA.

Nevertheless, contrary to our formerly bleak outlook for Germany's coal mining industry, which was predicated on the German government's extensive agenda for carbon emissions reduction, we have revised our position and now expect Germany's coal mining sector to prove resilient over coming years. Germany is currently Europe's largest coal producer besides Russia and we forecast German coal mining output to grow at an average rate of 0.5% y-o-y from 196.3mnt in 2012 to 202.6mnt in 2018. The German government's measures to curtail the use of coal in power generation will be limited in their efficacy. This has been highlighted by the fact that lignite-fired power plants produced 6% more power in 2012 than in 2011, accounting for 25.7% of Germany's total power production. Subsequently, 2013 became the biggest year for lignite-fired power generation since 1990, producing 26.4% of Germany's total electricity. Consequently, investment into brown coal mining has failed to run dry in Germany. Swedish energy company, Vattenfall, is forging ahead with plans to relocate villages in the Lausitz region, East Germany, in order to access billions of tonnes of brown coal reserves. The company aims to open a new opencast mine to be operational from 2030-2070, thus indicating the long-term future for German lignite mining.

2. Iron Ore Mining To Come Under Threat

Iron ore mining in Europe is set to stagnate in coming years as weaker global demand growth and booming supply outside Europe precipitate prolonged decline in iron ore prices, disincentivising further investment in the high cost areas of the sector. We forecast iron ore prices to decline from their recent peak in 2011 of on average USD176/tonne to average USD95/tonne in 2018. For the next few years we expect the status quo of European iron ore production to remain. We anticipate slow growth in output from the largest European producers, Russia and Ukraine. Russia will grow on average 2.4% y-o-y and Ukraine 2.0% y-o-y between 2014 and 2018, accounting for the vast bulk of incremental ore production. Output growth in Kazakhstan will be modest at around 2.3% y-o-y between 2014 and 2018.

Elevated prices during the late 2000s created opportunities for European iron ore miners, particularly the Nordics, to expand production and capitalize on strong Chinese demand boosting prices. Between 2008 and 2010, Norwegian iron ore output leapt over 300% from 0.7mnt in 2008 to 3.3mnt in 2010. However, we anticipate that weakening iron ore prices will hold back growth in the years to come. Between 2010 and 2012, Norway's iron ore output declined 22.5% from 3.3mnt to 2.5mnt. As iron ore prices continue to head south, we expect stagnation in output to be the dominant trend for the country's iron ore sector.

Appealing Deposits, Challenging Economics
Finland & Sweden - Iron Ore Projects

Our outlook for stagnant growth is also applicable to the Swedish iron ore sector. We forecast growth to average 1.7% y-o-y from 2014 to 2018, with 2018 output reaching 28.5mnt. Swedish iron ore production is ten times larger than Norwegian. The Swedish industry has undergone strong growth since the mid-2000s, but has not experienced the stellar growth rate seen in the Norwegian industry, due to growth from a larger base. Swedish iron ore output grew on average 4.0% y-o-y from 22.3mnt in 2004 to a peak of 26.2mnt in 2011. From 2011 to 2012, output fell 0.9% to 25.9mnt and we believe that this constitutes the beginning of a trend of relative stagnation in Swedish iron ore production.

Scandinavian iron ore miners will face difficult times ahead, paving the way for increased consolidation as junior miners go under. One of the region's best-known new iron ore miners, Northland Resources, filed for bankruptcy protection in Q113. This case highlights the impact of weaker iron ore prices on smaller enterprises and we expect it to act as a deterrent to future mining companies considering investment in the Nordic iron ore sector.

3. More Stringent Regulation On The Horizon

We expect more stringent environmental legislation to be a key trend to play out across Europe's mining sector. Over 2013 the governments of Finland, Sweden and Kazakhstan all announced stricter environmental protection regulation, which will potentially add to bureaucracy and licensing times for new projects. The Swedish government also announced the implementation of greater social impact assessments to ensure mining projects benefit local communities.

Europe: Mining Regulatory Outlook
Country Change On Last Quarter Index Comment
Finland Neutral 69 Stable regulatory environment, however strict environmental protection laws.
Sweden Neutral 69 Stable regulatory environment, however strict environmental protection laws and social impact assessments.
Bulgaria Neutral 68 Low tax rates favourable for foreign miners.
Poland Neutral 67 Taxes on silver and copper are based on average LME monthly metal prices and the dollar exchange rate. No plans to increase mining taxation for the foreseeable future.
Czech Republic Neutral 60 Bill under discussion to amend the Mining Act to better compensate citizens living in the vicinity of coal mines.
Kazakhstan Negative 60 Stricter environmental regulation ahead.
Slovakia Neutral 57 Corruption remains a key concern.
Ukraine Neutral 57 Low tax and royalty rates. Corruption remains a major concern.
Romania Neutral 54 Large state share in all mining projects.
Russia Positive 52 Legislative amendments hint at an improving outlook for foreign investment, despite corruption and high barriers to entry.
Germany Neutral 50 Hostile government stance toward coal mining.
Source: BMI

4. Long-Term Promise For Rare Earths

We expect increased production of rare earths in Europe in an effort to break China's effective monopoly on the market. Russia recently announced further spending of USD1bn into the development of rare earths. News in Q313 from Greenland that the country's parliament had voted to lift a decades-long ban on the mining of radioactive materials provides a significant boon to the outlook for European rare earth production. The ban had prevented the mining of rare earths as the prohibited radioactive element thorium would be an inevitable by-product. Lifting the ban will have to be ratified by Denmark, however all signs point to the decision receiving the necessary approval.

Greenland is one of the countries with the greatest mining growth potential in Europe, albeit from a negligible base, as it has substantial iron ore, zinc, uranium and rare earth reserves. If the country's mineral potential is realised, it could help Greenland's transition towards full independence from Denmark.

China's Dominance To Diminish
Global: Rare Earth Production, 2013

5. Public Opposition To Present Major Downside Risk

We expect local opposition to mining operations to present a major downside risk to project development in Europe. In November 2013, the Romanian government was forced to abandon its plans to allow Canadian miner, Gabriel Resources to develop the Rosia Montana gold project in the country. This was due to a huge campaign and protests by anti-mining activists. Similarly in Greece, recurrent anti-mining protests in the north of the country continue to push back development of Eldorado Gold's Perama Hill gold project. We expect this trend of public antipathy towards the mining sector to constitute a major downside risk for miners in Europe as we expect sentiment to remain sour for the foreseeable future due to greater environmental and social impact concerns.

Read the full article

This article is tagged to:
Related sectors of this article: Mining
Geography: Kazakhstan
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.