Mining In Austere Times: Winners & Losers

BMI View: While global mineral production growth will generally soften alongside the economic slowdown in China, there will be significant variation between commodities. Notably, the coal and iron ore sectors are in for greater production expansion compared with other minerals. Below, we discuss the outlook in the different mining sub-sectors, underlining the key trends at play in the production of each mineral over the coming quarters.

The global mining industry is girding itself for a protracted period of austerity as the downshift in the Chinese economy is set to drag on mineral prices over the coming quarters. Mining companies are struggling to right their ships having been battered in 2013 by a combination of weakening prices, rising cost pressure and in some instances, significant domestic challenges. Therefore, our production forecasts incorporate scepticism as to whether projects announced by miners across the spectrum will come to fruition in the coming years.

The coal and iron ore sectors are in for better fortunes compared with most other minerals. Resilient demand for thermal coal in Asia will continue to fuel growth in the coal sector while low cost mining operations in Australia provide a firm platform for further increases in iron ore production. Indeed, we expect these two minerals to lead the bulk of increases in global tonnage over the coming years. Crucially, this will have significant implications on not just mining servicing firms, but also the dry bulk shipping sector. Around 4bn tonnes (bnt) of dry bulk cargo (predominantly coal, iron ore and grain), or one-third of all international seaborne trade, were transported by sea in 2012.

More Losers Than Winners
Global Mine Production - Average % chg y-o-y

BMI View: While global mineral production growth will generally soften alongside the economic slowdown in China, there will be significant variation between commodities. Notably, the coal and iron ore sectors are in for greater production expansion compared with other minerals. Below, we discuss the outlook in the different mining sub-sectors, underlining the key trends at play in the production of each mineral over the coming quarters.

The global mining industry is girding itself for a protracted period of austerity as the downshift in the Chinese economy is set to drag on mineral prices over the coming quarters. Mining companies are struggling to right their ships having been battered in 2013 by a combination of weakening prices, rising cost pressure and in some instances, significant domestic challenges. Therefore, our production forecasts incorporate scepticism as to whether projects announced by miners across the spectrum will come to fruition in the coming years.

More Losers Than Winners
Global Mine Production - Average % chg y-o-y

The coal and iron ore sectors are in for better fortunes compared with most other minerals. Resilient demand for thermal coal in Asia will continue to fuel growth in the coal sector while low cost mining operations in Australia provide a firm platform for further increases in iron ore production. Indeed, we expect these two minerals to lead the bulk of increases in global tonnage over the coming years. Crucially, this will have significant implications on not just mining servicing firms, but also the dry bulk shipping sector. Around 4bn tonnes (bnt) of dry bulk cargo (predominantly coal, iron ore and grain), or one-third of all international seaborne trade, were transported by sea in 2012.

Coal To Lead Global Tonnage Increase
Global - Incremental Mine Output (mnt, 2013-2017)

Bauxite: Guinea To Boost Global Output

The global mining downturn will adversely affect the delivery of bauxite projects on the horizon. A bright spot, however, is that some of the largest expansion projects belong to major miners such as Chalco and Rio Tinto (Rio). In contrast to the juniors, there is generally a greater likelihood that these larger miners will push through with their expansion plans as a result of their stronger balance sheets.

A Boost From 2015 Onwards
Global - Bauxite Mine Production

We forecast global bauxite production to reach 344mn tonnes (mnt) by 2017, growing at an annual average rate of 5.9%. Output growth will slow down significantly between 2013 and 2015, before enjoying a boost with the ramp-up of mining production in Guinea towards the end of our forecast period. Bauxite production in Guinea will accelerate from 2015 onwards as output from several key mines kick off in earnest. These include the scheduled commencement of Alufer's Bel Air mine in 2015, as well as Rusal's Dian Dian mine and Alliance Mining Commodities' (AMC) Koumbia project by 2016.

Guinea Powers On
Global - Incremental Bauxite Output & Growth

Coal: Shifting Players, Continued Growth Ahead

The global coal sector is set for a significant shift over the coming years with an emerging pool of secondary suppliers challenging the dominance of traditional producers. We expect output growth in major coal-producing countries such as China and the US to weaken due to a number of factors including rising operating costs and a push towards greener initiatives. In contrast, secondary suppliers including Colombia, Canada, Mongolia and Mozambique will continue to expand their presence in the coal sector and capture a greater share of the seaborne market, targeting predominately shipments to Asia. A series of plans aimed at debottlenecking existing infrastructure and port facilities have been unveiled in these countries to complement new capacity being commissioned.

Changing Trade Fortunes
Coal Imports By Geography - China (LHS) & India (RHS), (% of Total Imports)

Unlike our bearish projections for most other industrial commodities, we expect thermal coal prices to edge higher and for Newcastle coal to average US$97/tonne between 2014 and 2017 ( see: 'Thermal Coal To Average US$91/tonne In 2014', August 20). Several supportive factors will maintain the uptrend in coal prices over the coming quarters. Specifically, import demand from China and India will continue to trend higher over our forecast period while exports from the US stagnate due to logistical constraints. As such, international coal trade flows will continue their profound shift from the Atlantic to the Pacific basin.

Uptrend Intact
Spot Newcastle Steam Coal, 6,700kc GAD fob (US$/tonne)

Copper: Digging More, Despite Challenges

We expect global copper mine production to march higher over the coming years as a pipeline of new projects and expansion plans come online. In contrast to other metals such as gold and aluminium, copper prices continue to trade comfortably above cash costs, posing less pressure on miners to exercise capital discipline in the current mining downturn.

Chile is set to account for the largest increases in copper output over the years to 2017 as a result of its extensive pipeline of mining projects. The country's Escondida mine, the world's largest copper mine at 5% of global output in 2012, is on track to boost annual production from 1.0mnt to 1.3mnt between 2015 and 2020.

That said, we caution that Chile's mining industry could be fast losing competitiveness. Apart from rising electricity prices and falling ore grades, the lack of water resources in the mineral-rich Atacama desert are posing significant constraints to mining operations ( see 'Water Scarcity The Next Big Challenge For Miners', February 25).. It is estimated that water consumption in the country, of which mining is the largest industrial component, is six times greater than water renewals.

Water Scarcity A Looming Challenge
Global - Water Stress Levels

Apart from Chile, other countries such as China, Mongolia and Peru will be key drivers of copper production in the coming years. Specifically, the ongoing development of the Oyu Tolgoi (OT) project in Mongolia is one bright spot in the mining industry. OT is the biggest economic undertaking in Mongolia's history, and will account for around one-third of the country-economy once it is fully operational in 2019. The mine has an expected production capacity of 450 thousand tonnes per annum (ktpa) of copper and 650 thousand ounces per anuum (kozpa) of gold.

Mongolia Set To Dazzle
Select Countries - Copper Mine Production (% chg y-o-y)

The risks to our copper production forecast are slated to the downside. Copper reserves will become increasingly challenging and expensive to access with declining ore grades and escalating cash costs. Crucially, it will become increasingly hard to justify investment into copper projects. Copper mines tend to be more capital-intensive and require longer-term payback period compared with other minerals. With the bulk of new copper supply set to come from greenfield projects, a further deterioration in prices could pull back mine supply considerably.

Greenfield At Risk
New Copper Supply - Greenfield vs Brownfield (%)

Gold: Losing Lustre, Digging Slower

With the bull run in gold prices behind us, mining companies will come under greater pressure to rationalise production in the face of depleting ore grades and escalating cash costs. Our forecast for gold prices to average US$1,235/oz between 2013 and 2017 implies challenging economics for many mining projects with the current all-in cash cost at US$1,200/oz ( see 'Gold: Potential Cost Crisis In The Making', July 31).

Soaring Costs As Ore Grades Dive
Gold - Avg Cash Cost & Ore Grade

Already, a large number of gold projects have been put on the backburner as miners struggle to secure financing amidst a risk-averse environment. Moreover, rising pressure for shareholders' returns will embolden the austerity push in the gold mining industry and spark off a wave of consolidation activity over the coming quarters. We expect the gold sector to become less fragmented over the medium term as more juniors head for the exit while a number of majors look to acquisitions rather than organic growth to expand production.

Consolidation To Creep In
Global - Gold Mine Production By Company (2012)

Despite the gloomy outlook in the gold mining space, we believe all is certainly not lost. China's voracious appetite for gold will continue to drive mining production over the coming years. The country will remain the main source of incremental gold output, adding around 1.7mn ounces (moz) of supply over our forecast period. Apart from increasing production at home, the Chinese government is also pushing domestic producers to boost the development of gold resources in neighbouring countries as part of the country's 12 th Five-Year Plan (2011-2015).

China On A Golden Quest
Select Countries - Gold Mine Production (moz)

Iron Ore: Big Three Drilling Hard

While miners across the board are squeezed by lower commodity prices and cost inflation, we believe the outlook for global iron ore output expansion remains relatively sound. The big three iron ore miners - BHP Billiton (BHP), Rio and Vale - are advancing with a raft of expansion plans despite the economic slowdown in China. These miners, which drive around 70% of the seaborne trade, will continue to capture sizable margins with their crushingly low production costs in Australia and Brazil ( see 'Iron Ore: Bolstered By Major Miners', September 24).

In Ore-Some Position
Select Companies - Average Cash Costs Of Iron Ore (US$/tonne)

We expect Australia to fuel the bulk of production increases over our forecast period. Our forecast for iron ore prices to average US$105/tonne between 2013 and 2017 should ensure the profitability of major miners in the years to come. On average, the cost of producing iron ore in Australia is US$30-50/tonne, compared with US$40-50/tonne in West Africa and US$120/tonne in China.

The rich deposits of high-grade hematite ores (iron content of 62.5% and above) and extensive infrastructure support in Australia will considerably lower the operational costs of mining projects. Additionally, the country's miners hold a cost advantage over their Brazilian counterparts due to their geographic proximity to China. Vessels from Australia take approximately 11 days to travel from Port Hedland to Qingdao (3,458 nautical miles) in China. This contrasts with 36 days from the Tubarao Port in Brazil (11,023 nautical miles).

Fuelled by Australia
Global - Incremental Iron Ore Mined Output & Growth

Aside from the traditional players, we expect West Africa to emerge as a centre of iron ore production. As little of the ramp up in output will be consumed domestically, the region will gain increasing dominance in the seaborne market over the medium term as pertinent efforts are made to improve infrastructure. Overall, we forecast global iron ore output to reach 2.5bn tonnes (bnt) by 2017, growing at an average rate of 4.5% per annum.

Healthy Growth, Despite Lower Prices
Iron Ore - Price & Mine Production

Lead: China To Dominate Output Growth

China will remain the main driver of global growth in lead mine output over the coming years, continuing a trend seen over the past decade. The bulk of growth will be fuelled by China Polymetallic Mining with the expansion of its Shizishan and Dakuangshan mines. Outside of China, other major producers such as Australia and the US will experience modest growth as depressed prices and record exchange stockpiles deter investment into mining projects. Indeed, capital flows into lead mining projects will be affected by the price outlook of other metals. Given lead's presence alongside zinc and silver deposits, few mines will be developed solely as lead projects, but rather produce lead amongst other metals.

Nickel: Digging Continues At Healthy Pace

Despite the axe miners are taking to current operations and future projects, we believe global nickel mine production will continue to grow at a healthy clip of 4.8% per annum between 2013 and 2017. Countries such as the Philippines, Indonesia and Australia will push production higher even though a raft of challenges is threatening project delivery.

We expect Philippines to account for the bulk of production growth over our forecast period. The homespun invention of nickel pig iron (NPI) in China will continue to underpin demand for high-iron laterite nickel ores in the Philippines. Subsequently, this will encourage domestic miners such as Nickel Asia to expand output capacity especially when the looming export ban on raw minerals in Indonesia could cede a greater share of the Chinese market to the Philippines ( see: 'Trade Policy Casts Shadow Over Commodities Sectors', Jan 22).

Philippines Ahead Of The Herd
Select Countries - Nickel Mine Production (% chg y-o-y)

While falling ore grades has been a particularly pertinent issue in the mining industry, the mining of nickel deposits is far more insulated from this risk compared with other minerals. Encouragingly, the production of nickel can sustain very low grade nickel ore at purity levels of 0.1%. In contrast, such grades would make any copper, zinc or bauxite mine economically unviable.

Platinum: Mining In Distress

In our view, the global platinum industry is set for a tumultuous few years as traditional producers South Africa and Russia struggle to increase output amidst escalating labour tension, rising cash costs and regulatory challenges. Labour unrest in the restive South African platinum belt shows no signs of abating following the 2012 Marikana massacre.

South Africa A Drag On Production
Select Indicators - Platinum Mine Production

Miners such as Amplats and Lonmin are coming under pressure amidst the intensifying turf war between the labour unions - the dominant National Union of Mineworkers (NUM) and the breakaway Association of Mineworkers and Construction Union (AMCU). The average cash cost of Amplats has soared over the past years, from US$450/oz in 2000 to US$1,911/oz in 2012. South Africa's platinum mines are characterised by deep underground operations that are extremely labour-intensive. With labour costs constituting around 60% of total costs for some companies, the inherent technical constraints and the difficulties of miners working away at persistently declining grades are eroding profit margins.

Rising Cash Costs To Induce Further Cutbacks
Platinum - Spot Price & Cash Costs (US$/oz)

In a move that will compound the challenges faced by miners, the South African government has in October, announced a limitation to the amount of water that will be made available to platinum mines. Given that South Africa accounts for over 70% of global platinum supply, the recent slew of negative developments in the mining sector will put a strain on platinum production ( see 'Troubled Outlook For Platinum', October 10). Indeed, mined platinum supply fell to its lowest level in 12 years, at 5.8moz in 2012, on the back of labour stoppages and mine closures in South Africa.

In South Africa's Hands
Global - Platinum Output By Country (2012)

Tin: China In Driving Seat

We expect China to fuel the bulk of the production increase in global tin mine production over the coming years. Admittedly, the surge in Chinese tin output since February has forced us to upgrade our average annual growth forecast for global tin mining from the previous projection of 2.3% to 3.8%. However, we are aware that our forecast may prove to be too optimistic as details on new projects and expansion plans in China are extremely difficult to obtain.

All About China
Select Countries - Incremental Tin Mine Output & Growth

Aside from China, Indonesia and Australia will account for the second and third-largest increases in global tin production. The introduction of tighter beneficiation rules and the move to lock all Indonesian tin exporters into a domestic trading platform will adversely affect mining production over the near term ( see 'Tin Outperformance To Continue', August 14). However, our forecast for tin to remain an outperformer in the industrial metals complex means we expect prices to incentivise domestic production over the medium term. Tin's primary use in the electronics sector and continued price-supportive action from the Indonesian government will lend support to prices even as the downshift in the Chinese economy gains traction.

Zinc: Subdued Growth In Place

While China will remain the main source of incremental zinc output globally, a growing number of domestic miners will come under pressure from tighter regulations, market oversupply and weakening end-user demand over our forecast period.

Dragged Down By Depleting Reserves
Global - Zinc Mine Production & Growth

The exhaustion of several large size deposits and a lack of new projects on the horizon will continue to stifle growth in zinc production. In addition to the closures of the Brunswick and Perseverance mines in Canada in 2013, the Century mine in Australia, Lisheen mine in Ireland and Skorpion mine in Namibia are among a string of zinc mining operations that are set to be depleted by 2016.

Tough Digging Underground
Zinc - Mining Operations By Type
limited opportunities for brownfield mine expansions to take place
Select Minerals - Mine Production Growth
2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f
Bauxite -9.7 13.1 8.2 7.3 3.6 3.7 4.0 9.1 9.3
Coal 3.3 3.9 6.4 2.3 3.8 4.1 3.9 3.5 3.5
Copper 1.2 1.6 .9 4.8 3.4 3.6 3.5 3.2 2.9
Gold 5.6 8.2 .1 -.9 1.1 2.1 2.3 2.2 2.0
Iron Ore -5.4 17.1 3.8 -5.8 5.3 4.8 5.2 4.4 3.6
Nickel -8.7 14.4 19.8 6.4 5.6 5.6 5.2 3.9 3.6
Lead 8.6 -.9 14.3 13.4 5.5 6.1 4.6 4.3 5.4
Platinum 2.8 .9 4.7 -9.8 -7.1 -1.4 2.2 2.5 2.4
Tin .3 .9 -5.1 -8.7 8.5 2.4 2.8 2.8 2.3
Zinc -3.6 6.5 4.3 5.7 4.1 3.3 3.3 3.0 -.4
f = BMI forecast. Source: BMI, WBMS, EIA
BMI Forecasts
Commodity Unit Spot Price 2013f 2014f 2015f 2016f 2017f
Gold US$/oz 1,343 1,425 1,250 1,150 1,150 1,200
Nickel US$/tonne 14,850 16,000 15,000 17,500 16,000 16,500
Aluminium US$/tonne 1,879 1,900 2,000 2,100 2,200 2,250
Copper US$/tonne 7,332 7,300 6,800 6,750 6,500 6,500
Zinc US$/tonne 1,962 2,000 1,950 2,050 2,100 2,150
Lead US$/tonne 2,205 2,200 2,250 2,300 2,400 2,420
Steel (MEPS Carbon Steel) US$/tonne 703 710 695 690 685 690
Tin US$/tonne 23,225 22,300 22,500 23,000 25,000 25,000
Iron Ore US$/tonne 133 130 110 100 95 90
f = BMI forecast. Source: BMI, Bloomberg. Note: Spot price as of October 23, 2013.

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Geography: Global, Australia, Brazil, China
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