Charting a New Normal - Uncertainty and Conflicting Signals in the Mining Sector
Miners adapt to continue operations on shaky ground and look for signals going forward
It has been a long ten months in the mining sector, with volatility touching every facet of production. Now, markets are reacting to news of successful vaccines and hopes that the end of the pandemic is in sight. But there is still a long way to go. "Normal" likely won't be within reach until 2021, even spilling into 2022, and what normal will look like is unknown. Miners can use this time to apply a critical eye to their supply chain experience to determine what went right, what went wrong, and use this insight to craft a post-COVID reality that better serves their needs.
Miners managed challenges with creative solutions
Designated with essential service status in most major-producing countries like Canada, the United States and Australia, mining operations continued through the pandemic and its various stages of lockdowns though the effect wreaked havoc even while work continued. Intermittent shut-downs to cope with local outbreaks, supply chain disruptions and commodity scarcity all challenged the status quo of operations. For other major producing countries like Peru, a lockdown brought both supply chains and operations to a grinding halt.
To put it starkly, a study from Mining.com reported that the pandemic had cut the world's top 50 mining companies' market capitalization by more than $280 billion in Q1 2020. In an incredible turnaround, by the end of September the market cap had added back more than $80 billion and is now poised to top $1 trillion in market cap for the first time, while still in the throes of the pandemic.
Clearly, the whipsaw of uncertainty has relied on revised order decisions and the ability to find solutions on uneven ground.
The heavy equipment supply sector provides us with one example of finding solutions amidst the challenge. The largest OEMs reported production issues around the globe ranging from complete production halts and slowdowns to closing local store fronts and laying off employees. Sales are suffering too, as Hitachi reported in October that sales profits were down 39% from last year. Recovery from these challenges won't simply mean a quick snap back to the way it was before. Analysis from OEM Off-Highway recently reported that the OEM industrial market segment is down 12% in 2020 and is not expected to return to pre-COVID levels until 2023 in the North American market.
At the same time that OEMs have struggled, auctioneer Ritchie Bros. has experienced record breaking demand in used heavy equipment sales, recently reporting a 39% increase in bidder registrations and has experienced a stock surge of 79% from March to November 2020. Pivoting in the moment to find ways to obtain heavy equipment is a strong play, but on the flip side, miners should be factoring in the maintenance and availability implications down the road.
New pressures on existing supply chains require adaptation and one hint of change emerges from the aftermarket parts segment. For instance, Epiroc made a decision early in the pandemic to turn increased attention to servicing aftermarket customers, and analysis from industry watcher Deloitte advises all OEMs to focus on aftermarket services as a way to survive the threats brought to their business by the pandemic.
As press releases from OEMs and mines announcing major acquisitions during the pandemic appears to have slowed to a trickle, and as some miners ride out the COVID storm with used equipment, those with a long life of mine might consider placing orders now while the retail market is softer and longer lead times can be managed.
Looking Forward: Prices are Rising & Prices are Falling
The economic recovery and its impacts on commodity markets is fraught with uncertainty. The recovery is driving demand and costs - stimulus along with continued disruptions while we wait out widespread global vaccination leaves us without a clear sight of when that might end.
China is driving much of the demand. From a global perspective, the OECD reports that China will be the only major economy to experience economic growth in 2020, and the scale of commodity imports of copper and aluminum, among others, support that growth.
Government spending coming from all corners of the globe post-pandemic will buoy commodities as well. Iron ore, nickel, zinc and copper prices are all rising as the economy gets ready for a green-focused round of stimulus spending.
Steel prices had been volatile from the period even before the pandemic and have been on a rocket since the initial economic shock registered in May, rising 50.7% to December, based on North American cold rolled steel data from ProPurchaser. Some elements of this include recent supply; global production suffered through the pandemic except in China, where modest production gains were made. Forward looking steel prices are anything but a sure bet. Strong Chinese steel output could flood the global market and soften steel prices, especially as the Northern hemisphere typically slows down its steel consumption during the winter, but the effects of forthcoming stimulus spending may add new upward pressure on prices instead.
Iron ore has also been on a wild ride, recently hitting record highs set in 2013. As Vale announces that it will miss forecasted production for 2020 and 2021, the convergence of raw materials to finished product is likely to apply more pressure to steel prices.
The cost of energy is another commodity in flux. Bottoming out in the spring as the pandemic reality of a long-term event set in, greatly reduced fuel prices provided some unexpected relief to miners' balance sheets. Projections for fuel prices going forward are mixed; OPEC projects that pre-COVID demand will return by 2022 though analysts from the Bank of America suggest a three year recovery is more realistic.
Where do miners go from here?
Cboe's Volatility Index, better known as VIX, is used to gauge the stock market's fear of volatility. After spiking in February, marking the early signs of the pandemic, it now sits at its lowest rating since the pandemic began, signaling a move in the right direction for economic recovery. Further support comes from the Purchasing Managers Index (PMI). The PMI for manufacturing in China tells a success story, improving each of the last seven months, setting a ten year high in November. The PMI noted improved growth in the US market as well, though still suffering from supply chain disruptions. While there will still be fires to fight in the supply chain while this plays out to the end, miners have an opportunity to take stock of the past ten months to chart a way forward.
The next generation of smart supply chain management is multi-faceted. A differentiator for miners in the new normal will be buyers prepared to arm themselves with market intelligence and commit effort and resources to track fluctuating pricing and trends.
Miners have always had to balance supply chain trade-offs, but at the end of this year of uncertainty the sharp edge of the knife has never been more pronounced. Is it preferable to get assured pricing without committing to term, or is the need greater to assure supply? How can miners be confident that the supply will be there without scratching at their bottom line with held inventory? What will suppliers do or require to shore up their businesses after their own post-COVID assessments and how will miners cope with potential new demands?
Navigating this uncertainty is the challenge for miners now, in the run-up to vaccine delivery and economic stability, and into the new normal.