This document focuses on a number of topics that pertain to the mining industry as a whole, including the outlook for the oil industry, the increase in coal mining productivity, the Environmental Protection Agency (EPA) plans to roll back fuel efficiency standards, the launching of Responsible Mining Index 2018, the expected growth in the market for underground mining equipment, and a brief summary of trends in used equipment values.
Oil Industry Outlook: In 2017, the price of oil rose more than 12%, posting an annual gain for the second year in a row. Keeping up the momentum, oil got off to a strong start this year with the West Texas Intermediate (WTI) crude futures climbing 7.1% in January. Though this benchmark tumbled 4.8% in February in the wake of a broad stock market selloff, crude continues to trade above the psychologically important $60 per barrel level. The key question is, are prices sustainable or have they risen too far, too fast? The sentiment in the oil market has not been this good in years, with U.S. crude prices recently hitting a more than three-year high of around $66 – a spectacular recovery from below $30 in early 2016. While it is extremely difficult to predict movements in oil prices, analysts have identified several fundamentals that support the rising trend:
Extension of Production Cuts — OPEC and other major producers agreed to extend the cut in oil production beyond March to the end of 2018, thus continuing to narrow market imbalances.
Sharp Drawdowns in inventory — Oil stockpiles have shrunk in 35 of the last 47 weeks and are down approximately 110 million barrels since April last year as a result of lower imports and spiraling exports. At 423.5 million barrels, current crude supplies are 19% below the year-ago period.
Booming Exports — Following the lifting of the four-decade long ban on oil exports at the end of 2015, the U.S. witnessed a substantial increase in demand for its oil. Average exports in the first six months of 2017 were around 75,000 barrels per day and soared to an all-time high of 1.7 million barrels per day during October. With U.S. crude trading at a fair discount to international benchmark Brent, U.S. oil remains attractive to foreign buyers.
Favorable Economic Data — The final three months of 2017 saw U.S. GDP grow by 2.6% following gains of more than 3% in the previous two quarters. This marks one of the strongest stretches of growth since the economic recovery started in mid-2009. In January 2018, the unemployment rate remained at a 17-year low of 4.1%, while the average level of jobless claims continues to hover at just over 200,000, the lowest level since the early 1970s. In addition, wage growth in January hit the fastest pace in more than eight-and-a-half years. Finally, strong earnings reports from corporate giants boosted sentiments.
According to analysts at Zack’s Investment Research, though the triple-digit levels experienced in 2014 look improbable, we can expect oil prices to continue to head higher. They believe that for the time being it is likely that improving fundamentals have put a floor under crude prices. While this may be true, one has to remember that although Syria is not a significant oil producer, the wider Middle East is the world’s most important crude exporter and tension in the region tends to put oil markets on edge.
U.S. Coal Mining Productivity Increases as Production Falls: According to the U.S. Energy Information Administration’s (EIA) Annual Coal Report and data from the Mine Safety and Health Administration (MSHA), coal mining productivity in the U.S. increased 26% over the past five years, reaching 6.8 tons per miner hour in 2017, up from 5.4 tons per miner hour in 2012. This increase occurred despite mine closings and decreasing employment and production. Both technology and process improvements contributed to the increase in productivity, but a more significant factor is the distribution of productivity across mines. The mines that are first to close during market downturns are often the ones with higher production costs and lower productivity, while more productive mines remain in operation, thus increasing overall productivity. Of the 1,229 mines operating in 2012, an estimated 547, or 45%, have since been closed or idled. Over the same period, miner hours declined by 39%. U.S. coal production has also fallen, but to a lesser extent, decreasing from 1,016 million tons in 2012 to 774 million tons in 2017, a 24% drop. During 2017, productivity ranged from 2.4 tons per miner-hour in Central and Southern Appalachia to 28.8 tons per miner-hour in the Powder River Basin. This wide range is a result of fundamental differences between the coal-producing regions, including the size of mines, coal seam geology, extraction technology, and coal types.
After several years of declines, coal production and employment rose in 2017. According to data from MSHA, coal production in 2017 increased by an estimated 6%, and total labor hours rose by 7% from the prior year. These increases were driven in part by the stabilizing financial condition of producers that had been in bankruptcy proceedings during 2016 and by increasing export demand. U.S. coal exports were 97 million tons in 2017, up from 60 million tons in 2016, and at the highest level since 2014. In 2017, export markets were a destination for an estimated 13% of total U.S. coal production.
Steel Industry Applauds EPA’s Plans to Roll Back Fuel Efficiency Standards: The EPA plans to revisit federal greenhouse gas standards for 2022-2025 model year vehicles, intended to combat climate change and reduce consumption of finite fossil fuels. These standards have posed a threat to the steel industry’s long dominance as the material of choice for automakers. They would open the door for lighter but more expensive alternatives like aluminum, thereby forcing steelmakers to develop more advanced high-strength steel products. The belief is that a reduction in these forthcoming standards may restore some demand for traditional steel since automakers have mainly been focused on reducing emissions by cutting the weight of cars, trucks and SUVs. The EPA recently shared its belief that a requirement for automakers to average 54.5 miles per gallon by 2025 is too steep, partly because gas prices have fallen since the regulations were imposed, and fewer consumers are buying smaller cars.
“Today’s announcement by Administrator (Scott) Pruitt is a positive development for the steel industry and our partners in the auto sector,” American Iron and Steel Institute President and CEO Thomas Gibson said in a statement. “In the past, we expressed concern the good faith efforts by our industry and our customers were short-circuited by the previous administration in an attempt to push through a final determination before all of the public comments were thoroughly considered.” Steelmakers have argued the fuel efficiency regulations were short-sighted since they focus only on tailpipe emissions and could in fact ultimately increase the amount of greenhouse gases released into the atmosphere, by boosting emissions from aluminum smelters and other steel rivals.
Responsible Mining Index 2018 Launched in Geneva, Switzerland: The Responsible Mining Index 2018 was launched on April 11 and is the first of a multi-year initiative by the Responsible Mining Foundation. This organization supports the principle that mining should benefit economies, improve the lives of people, and respect the environments of producing countries, while also benefitting mining companies in a fair and viable way. Its goal is to encourage continuous improvement in responsible mining by large-scale companies across a range of economic, environmental, social and governance (EESG) issues.
The Responsible Mining Index 2018 aims to support the goal of the foundation and to support leading practices and learning. The Index is independent of the industry and covers 30 large-scale mining companies. These companies represent 25% of the global production of mined commodities and operate over 700 mines in more than 40 countries. The index assesses and compares company policies and practices across six different EESG areas: economic development, business conduct, lifecycle management, community wellbeing, working conditions and environmental responsibility. As an evidence-based assessment, the Index measures the extent to which companies can demonstrate, rather than simply claim, that they have established responsible policies and practices. Among the key findings are:
- The vast majority of the assessed mining companies demonstrate responsible practices on certain particular issues. However, very few companies show systematic action taken across a wider range of key issues. For example, little or no action is being taken to monitor the impacts of mining on children, track whether community grievances are being dealt with appropriately, or check that workers’ wages meet or exceed living wage standards.
- Many companies have not put into practice some of their own policy commitments such as those pertaining to the management of human rights issues.
- Although companies are collectively demonstrating responsible mining across many issues and strong cases of leading practice are evident, few companies keep track of how effectively they are managing EESG issues and fewer still can demonstrate that they are working to improve their performance.
- Companies typically show a lack of systematic attention to monitoring their performance on EESG issues and reporting their performance to other stakeholders, including mining-affected communities. This lack of ‘knowing and showing’ their own performance is most evident at the mine-site level.
A lack of public reporting is most likely one of the main factors limiting company scores in the Index. Performances might be considerably higher if companies were more transparent about their management of EESG issues. Greater openness would also enable more learning and sharing of good practices.
Underground Mining Equipment Market Expected to Grow at a GAGR of 6.24% by 2024: Underground mining is the process of extracting mineral and ores that are buried too far underground. The primary objective of the underground mining is to extract ore from underground as safely and economically as possible while producing as little waste. According to an April 2018 report issued by Research Nester, a leading research provider for strategic research and consulting, the underground mining equipment market is expected to grow at a CAGR of 6.4% over the 2017-2024 forecast period. Rising development in major countries across the world and growing industrialization particularly in emerging economies is increasing the demand for metal and minerals. Increasing mining activities and improving economic conditions across the world are motivating miners to invest in advanced underground mining equipment to improve their productivity. Additionally, government regulations related to mining safety, employment, environment, and equipment usage have also strengthened the demand for technologically improved underground mining equipment. At present, Asia Pacific is dominating the global market with a leading share because of the increase in mining activities in the emerging economies of China, and India. A recent noticeable trend in the global underground equipment market is the massive thrust on developing innovative and more effective mining equipment for transportation, excavation, washing and screening processes that helps to keep energy costs at bay.
Caterpillar, a key player in the underground mining equipment market, and Minetec, a wholly owned subsidiary of Codan Limited, recently announced an agreement for the development and delivery of technologies targeting underground hard rock mining challenges. The collaborative work will deliver best-in-class site solutions for mining customers and will be offered as part of Cat MineStar. Caterpillar expects the integrated solutions to focus on applications of underground mobile equipment and to enable expansion of MineStar capabilities through the use of improved high precision tracking and wireless communications, task management technology and proximity detection.
Trends in Used Equipment Values
The market for most used mining equipment continues to be very soft, largely due to an oversupply brought about over the past few years as a result of a number of economic and technological factors. As such, the holders of this equipment have been reluctant to sell in a market in which the oversupply has caused prices to be depressed. Although the prices of such equipment are still relatively low, they appear to have leveled off, due in part to the shortage of used equipment coming to auction and the relatively high cost of newer equipment.
At the same time, the demand for new equipment with current technology and greater efficiencies continues to grow as a result of the heightened focus and anticipated growth in underground mining, growing industrialization in emerging economies, the global push to raise emissions standards, and government regulations pertaining to the factors cited in the previous section.