This document focuses on a number of topics that pertain to the mining industry as a whole, including the outlook for iron ore prices, the undersea approach to mining, the forecast for strong growth in the market for mining equipment, the positive outlook for oil brought on by the tariff delay, a veteran investor’s perspective on gold as an investment, and a brief summary of trends in used equipment values.
Iron Ore Prices Peak, Expected to Lose Steam: According to Fitch Solutions’ latest commodity price forecast, iron ore prices have peaked and will head lower from spot levels over the rest of the year as supply issues ease and Chinese demand temporarily softens due to current yuan strength. While iron ore prices will see a correction in the coming months, Fitch analysts do not expect a strong collapse. Economic stimulus provided by the Chinese government to stabilize growth has and will continue to keep steel production strong in 2019 and 2020, especially with the re-escalation of the trade war with the U.S. boosting the demand for iron ore. For the next three to six months, Fitch analysts have raised their iron ore price forecast for 2019 from $80 per ton to $90 per ton. A price rally in the second quarter that resulted from supply disruptions and strong demand served to move the year-to-date average higher.
Iron ore prices started the year with a rally as the January collapse of a dam at Vale’s Córrego do Feijão mine in Brazil and the legal aftermath threatening Vale’s supply sent prices skyrocketing. In addition, extreme weather in Australia led to the closure of important ports following which BHP and Rio Tinto revised their production guidance downwards, resulting in further price rallies. Fitch believes that the iron ore price rally has reached its pinnacle and prices will now embark on a correction as exports from supplying countries revive and a weakening yuan dampens Chinese demand. In 2020, Fitch expects prices to hold up as Chinese demand remains strong as a result of infrastructure project constructions rolling on. Analysts believe prices will average $80 per ton, lower than 2019, as they will start from a lower base. Beyond 2020, Fitch expects prices to drop from an average of $80 per ton to $57 per ton by 2023.
Undersea Mining Could Provide Vast Resources: Undersea mining is beginning to look like a lucrative option for many companies. Certain precious metals are becoming expensive and rare earth elements that are much more common in the seafloor than underground are vitally important to new technologies. The combination of technological advancements and depletion of land resources has made undersea mining a viable alternative. “Given that 70% of the planet is covered by water and that significant high-grade mineral resources have been identified on the ocean floor it makes sense for the mining industry to move offshore in much the same way the oil and gas industry did 50 years ago,” said Mike Johnston, CEO of Nautilus Minerals. According to Duncan Currie, a New Zealand lawyer and member of the Deep Sea Conservation Coalition, a group of about 70 environmental organizations, “Many hundreds of millions of dollars are being invested around the world. There is no doubt companies see money that can be made.”
It isn’t just common minerals and metals below the surface. Rare earth elements play key roles in new technologies, and it takes a lot of work to extract them from land deposits. For example, neodymium and dysprosium make powerful magnets for wind turbines, and tellurium is a key component in solar cells. “Green tech, moving from hydrocarbons to renewable resources, is requiring a vast amount of rare metals. For some of the green technologies, there is not enough to go around on land,” said James Hein of the U.S. Geological Survey. “But there are tons of it in the oceans.” China produces 90% of the rare earth elements used in production despite having less than a quarter of the land deposits. The process for extracting them is expensive, inefficient, and dirty. Countries that can instead harvest those rare elements by way of undersea mining will be at a distinct advantage. “There’s a couple of billion people trying to get into the middle class. It’s requiring a vast amount of new metals,” Hein said. “All their new homes need metals, not only in the building itself, but in all the things you put into a home.”
Mining, no matter where it is, comes with environmental questions. Part of the International Seabed Authority’s mission is to ensure minimal damage to the ocean floors, and it has a self-imposed deadline of 2020 for finalizing regulations. At the same time, an argument can be made that undersea mining is less harmful to the environment than terrestrial mining. China’s development of rare earth elements has harmed vegetation and caused soil erosion and acidification. If these elements can be obtained much less harmfully from the sea and contribute to green energy technologies, that’s a net benefit. With the plentiful resources and profit potential, it’s unlikely companies will be deterred from undersea mining. “We do want to find an environmentally responsible way to do it,” said Christopher Williams, managing director of UK Seabed Resources. “Reputationally, ethically, morally, it’s important to get it right.”
Strong Growth Forecast for Mining Equipment Market: According to Brandessence Market Research the mining equipment market was valued at $116.78 billion in 2018 and is expected to reach $206.05 billion by 2025 with a CAGR of 8.45% over the forecast period. Mining equipment varies by type based on the specific activities that are being carried out such as mining above or below ground or mining for gold, metals, coal or crude oil. Drilling machines, excavators, crushing and grinding equipment are some of the more common types of equipment. Some major players currently in the global mining equipment market are AB Volvo, Caterpillar Inc., Deere & Company, Doosan Corporation, Epiroc AB, Hitachi, Ltd., Komatsu Ltd., Liebherr-International AG, Metso Corporation, and Sandvik.
The global mining equipment market is being driven by the increasing demand for advanced mining equipment. The population growth rate, urbanization in China and other Asian countries, and continued needs in developed countries have resulted in high demand for minerals and metals, thus propelling the market. Studies have shown that when per capita income in a country reaches $5,000-$10,000 per year, metal demand increases quickly in that particular area. Those in the mining industry are increasingly investing in new mining equipment with advanced technological sensors, cameras and automation systems that enable the operator to work more efficiently and improve production with fewer human resources. The automation of physical mining jobs is playing a vital role in easing day-to-day operations in the industry. Innovative mining equipment like self-driving ore trucks and robotic mining drills and assistants, is becoming much more prevalent. A new report from the World Economic Forum and Accenture estimates that digitization could deliver more than $425 billion of value for the mining industry, customers, society and the environment over the next 5 years. However, while the trend toward automation is helping to expand the mining equipment market, the adverse effects on the environment and stringent government policies regarding mining activities may potentially hamper that growth.
Tariff Delay Brightens Outlook for Oil: The U.S. recently agreed to postpone until mid-December a 10% tariff on Chinese products on many holiday-shopping list items, including mobile phones and toys. On August 13, top officials from the U.S. and China spoke and agreed to resume trade discussions in the near future. As a result, the price of crude oil jumped the most since early January as the trade deadlock between the world’s biggest economies showed signs of easing, calming fears that global economic growth would be endangered. According to a Bloomberg survey, expectations of declining U.S. crude supplies are also driving bullish sentiment as inventories dropped by about 2.5 million barrels about a week before the announcement.
With the news of the postponement, optimism swept across financial markets and the price of New York-traded crude rose 4.6%. “Some of the pessimism about oil demand and the trade war is being washed out of the market by these announcements,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. However, although the price of oil has risen, it is still down for the month of August as Saudi Arabia’s pledge to curb exports in a matter of weeks hasn’t been sufficient to offset booming production from American shale fields and lingering fears about growth in demand.
Veteran Investor Encourages Purchase of Gold: Mark Mobius, former Executive Chairman of Templeton Emerging Markets Group, has given a blanket endorsement to buying gold, believing accumulating bullion will reap long-term rewards as leading central banks loosen monetary policy and the rise of cryptocurrencies serves only to reinforce the demand for genuinely hard assets. “Gold’s long-term prospect is up, up and up, and the reason why I say that is money supply is up, up and up,” Mobius told Bloomberg TV. He added: “I think you have to be buying at any level, frankly.” In August, gold hit a six-year high on prospects for easier monetary policy from the Federal Reserve and other central banks to support growth that’s been impacted by the prolonged trade war between the U.S. and China. With the U.S. Treasury market signaling that a recession may be on the horizon, investors have been swarming into bullion-backed exchange-traded funds. “With the efforts by the central banks to lower interest rates, they’re going to be printing like crazy,” said Mobius, who recommends allocating about 10% of a portfolio to physical bullion.
The increasing role of digital currencies such as Bitcoin has spurred a debate in the precious metals market both about their intrinsic worth, and whether their rising popularity will detract from gold as a traditional haven. Mobius believes their advent will actually boost bullion consumption. “You have all these currencies, new currencies coming into play,” he said. “I call them ‘psycho currencies,’ because it’s a matter of faith whether you believe in Bitcoin or any of the other cyber-currencies. I think with the rise of that, there’s going to be a demand for real, hard assets, and that includes gold.” Spot gold hit $1,535.11 an ounce on August 13, the highest price since 2013. In early July, Mobius correctly predicted that prices would top $1,500.
Trends in Used Equipment Values
As previously discussed, the market for new mining equipment continues to grow as those in the industry focus on opportunities to become more efficient, to improve productivity, and to prepare for new approaches to mining by investing in equipment with advanced technology. The market for new equipment is also benefitting from the fact companies are sensitive to the growing industrialization in emerging economies, the global push to raise emissions standards, and the impact of government regulations pertaining to mining safety, employment, environment, and equipment usage.
At the same time, although the prices for most used mining equipment continue to be very soft, 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. Contributing what have been relatively low prices is an oversupply of used equipment that has evolved over the past few years as a result of both economic and technological factors. As a result, the holders of this equipment have been reluctant to sell in a market in which the oversupply has caused prices to be depressed.