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Low oil prices continue to be good for mining

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World Coal,

The mining industry has been a main beneficiary of the decline in oil prices with operating costs falling as a result of lower diesel prices, according to new analysis from Moody’s Investors Service. And with the global oversupply of oil not likely to ease soon, the upside will continue with the potential for a further 4 – 5% fall in operating costs.

“For miners, expectations for low oil prices through 2017 are moderate positive, still far from sufficient to offset low prices for base metals, iron ore and coal tied to the slowdown in Chinese consumption,” said Carol Cowan, Senior Vice President and Moody’s.

“Mining is energy-intensive, with energy accounting for 20 – 25% of operating costs. Assuming oil-based fuels are half of that, and using our oil price estimate of US$33/bbl for 2015, operating costs could fall by as much as 4 – 5% from 2015 levels,” Cowan continued.

The effects will be seen particularly in opencast mine, which will spend les on fuel for trucks and machinery. “However, deeper, wider pits and declining ore grades can result in longer hauling distances, so cost benefits will vary by company and won’t necessarily be proportional to the fall in oil prices,” Cowan concluded.

Moody’s recently lowered its oil price forecasts for Brent crude and West Texas Intermediate crude to US$33/bbl through this year, rising to US$38/BBl in 2017 and US$43/bbl in 2018.

Price trends for oil and natural gas 2006 – 2018 (as of January 2017).

According to Terry Marshall, Senor Vice President at Moody’s, the revision reflects the continued global oversupply, very high inventory levels and additional Iranian production coming online, offsetting the expected reduction in US shale production.

“Oil prices have fallen dramatically since historically strong levels of mid-2014, when the increase in worldwide oil demand began slowing as non-OPEC supply, especially from the US, continued growing,” said Marshall.

“Meanwhile, Saudi Arabia in late 2014 signaled that it would no longer act as OPEC’s (and therefore the world’s) swing producer, and since then the world's biggest oil-producing country has not intervened to prop up global prices, but has continued to compete for market share. These conditions persist today and the prospects for higher oil prices appear distant.”

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