Nicholas Harwood, Deloitte Touche Tohmatsu, Australia.
The story of Australia’s mining boom has been well documented: the country rode a once-in-a-generation resources investment wave, arguably beating a GFC-period recession as a result. There is no doubt that mining will remain a true cornerstone of the country’s economy and prosperity going into the future.
In spite of recent falls in commodity prices, particularly coal and iron ore, Australia still has plenty of aces up its mining sleeve. For example, the country continues to hold some of the biggest and highest quality mineral deposits and is well located in terms of substantial customers, such as China, India, Japan and South Korea.
But in an increasingly competitive global sector, with growing cost pressures, red and green tape, social licence activism, a lack of new infrastructure and productivity challenges, these factors have the potential to derail Australia’s place as Asia’s supplier of choice.
However, Australia can still remain “the lucky country”, providing the majority of these man-made impediments are addressed.
Keeping an eye on the cycles
These strong and disruptive market forces and impediments, combined with the recent shift from exploration and construction to a production phase, have seen significant shifts in the fortunes of many miners and, by extension, those servicing the sector.
For Australian mining services operators, the good times have become tougher ones. The quarterly Deloitte Mining Services Index, based on the market capitalisation of the top 50 companies in the sector, highlights ongoing significant volatility, with many participants experiencing double digit swings each quarter.
While many service companies hitched a ride on the investment and construction phases – and borrowed heavily to meet the demand – they are now weathering the challenging trading conditions, bearing the brunt of an industry tightening its belt as supply has caught up with – and now exceeds – demand.
A lack of focus on input costs allowed them to rise significantly compared to global competitors. It also fostered the entry of many new operators, thus resulting in significantly larger supply chains. Commodity price reductions have brought increasing margin pressure and producers are seeking to alleviate this through radical overhauls of their procurement functions and demanding material cost reductions from their supply chains.
A coal case in point
As the coal capital of Australia, activities in Queensland – and the Bowen Basin in particular – provide many salient examples.Production at any cost, long-term take-or-pay commitments, a high Australian dollar, which has not followed the decline in commodity prices, as well as high cost structures, have led many mines to become uncompetitive and loss making. Many have been closed and many more are at risk.
As a result, the Queensland coal industry and associated mining services companies are undergoing structural change aimed at right sizing their operations and resetting a new cost base. Miners have enacted convenience clauses and not extended contracts to move away from contracting to owner-operated mines.
Fleets are being operated on run-to-fail policies, where maintenance expenditure is deferred because there are many surplus items of fleet that can replace the failed item.
Change or fail
While times have been tough for many – the negatives of the downturn have been there for everyone to see – some green shoots of improved operating conditions have also begun to emerge.
New service contracts are slowly being issued, as mines recommence operations (albeit with service operators needing to offer increasingly competitive prices) and as new mines are commissioned and developed. Some have also taken a lateral approach: anticipating and sidestepping the choppy waters of changed trading conditions, diversifying into coalbed methane. While many major projects are nearing production stage, the new expenditure for maintenance and drilling activities will be considerable.
In this case, entering and playing in the gasfield services industry represents a 20-year golden opportunity. But wanting to operate in gas and being able to do so are two quite separate issues: operators must be able to address challenges that include entry strategy, making sure they have the right resources and equipment and can meet the even higher safety standards. Cost pressures are starting to emerge and may increase if oil prices continue to decline, thereby impacting the gas prices traded in Asia Pacific.
Another emerging strategy is consolidation, which will ultimately reduce the overall number of companies, creating more multi-service, multi-mine operators with lower cost bases and economies of scale. More joint ventures and alliances may emerge, as the service companies battle to remain relevant to the producers.
The ongoing decline in new resources projects, as well as delays in commencing committed projects, continues to impact Australia’s mining services sector. It is unclear whether this downturn is cyclical or we have transitioned to a new norm for the medium/longer term. Overall, the sector is confronting disruption head-on and managing the shift via diversification and innovation, which is increasingly the difference between longer-term viability or failure. Strategies for increased automation are being explored and implemented.
Operators with earnings above expectations are either benefiting from diversified contract portfolios, including projects outside the resources sector, or they are servicing niche sub-sectors.
Again, cost agility will remain a key to preserving growth, as the competitive tendering environment continues to depress margins and increase project lead times, despite a solid pipeline of opportunities.
About the author: Nicholas Harwood is a Brisbane-based Deloitte Financial Advisory Services Partner and specialist across the Australian mining services sector.
Read the article online at: https://www.worldcoal.com/special-reports/08122014/world-coal-industry-view-adapting-to-a-new-mining-landscape-nicholas-harwood-deloitte-coal/