Bracing for Inflation; 2021 Is a Year to Keep a Lid on Costs
If volatility was the theme of 2020, inflation will likely be the watchword for miners in 2021. As a K shaped economic recovery unfolds, input costs across the board are in flux and inevitably, operational costs will be affected.
As a note on preparing for 2021, Tamarack Mining Services will share perspectives in a series of upcoming posts that provide cost outlooks for commodities, materials, and presents strategies to keep a lid on costs and combat inflationary pressure for mining supplies in 2021.
Stay Tuned - 2021 Recovery Has It All
Leading economic indicators agree that the economy as a whole is on a recovery path after the havoc brought by COVID-19, as vaccine delivery is in progress and global markets are stabilizing. Even the phrase "roaring 20s" is being lobbed about by market watchers, as there are signals we could be entering an economic boom.
One indicator to watch is the Purchasing Managers Index (PMI). The PMI measures purchasing trends in the manufacturing and service sectors as indicative of the prevailing direction of the economy. A PMI over 50 indicates growth and a rate lower than 50 indicates contraction.
The Purchasing Managers Index (PMI) slowly found its way back up from the cliff in April, and remarkably, has even settled at the end of 2020 higher than it was before the pandemic onset. The Canadian PMI finished 2020 14.8% above its December 2019 rate and the U.S. index finished a whopping 47.8% above its rate a year prior.
Another indicator to watch is the Baltic Dry Index (BDI). The BDI charts average prices paid for the transportation of dry bulk materials, essentially highlighting the supply and demand of manufacturing materials across 20 trade routes. A glace at the index over the past year reveals a familiar slump through the COVID-19 spring. Once again, though, the real story is that the recovery has far exceeded pre-pandemic rates.
Bracing for Inflation
Current economic indicators are painting a picture of increasing demand and rising costs, even beyond pre-pandemic norms. The “return to normal” unveiling before us is not a pre-pandemic status quo; rather this new normal includes significant inflation and increased costs, and these rising indicators represent real costs that miners will be facing in upcoming supply contract negotiations.
Taking the level of focus down a degree it pans out that generally, commodity prices are up; for instance, copper is poised for a bumper year, and iron ore and nickel prices are flourishing.
For other categories, recovery is underway, but in a slow and steady fashion; the American Chemistry Council has projected growth for 2021, though roughly in line with projected US economic gains for the year, at approximately 3.9%.
But as is the case in a K shaped recovery, not everything is going up. There are areas of spending that may offer cost relief for miners, including energy, electricity and labour.
Take Action To Manage 2021 Inflation The actionable story for miners in 2021 is to move now to control costs wherever possible. Recent advice in the Canadian Mining Journal from Costmine argued that miners have the ability to impact their bottom line by trimming supply costs.
Research from Tamarack Mining Services adds more colour to the picture – 50% of direct mining spending is ripe for cost savings. Indeed, challenging the status quo of existing procurement can bring significant savings. Miners must re-examine contracts, re-engage with existing suppliers, expand supplier circles and be prepared to go to market to improve their bottom line.
With the economy rebounding and inflation bearing down on many cost categories in 2021, bucking the set-and-forget approach to procurement is the best way to keep a lid on costs in the coming year.
Check back with Tamarack Mining Services through January to read our Insights for 2021 -cost analysis – we are looking at what is going up, going down, and what actions miners can take to control costs.