Has the bottom of the mining downturn been reached?
Mining is a cyclical industry and is always riding the troughs and waves of high and low commodity prices, but rarely in history has it slumped this low, this quickly.
Every day for the past year operators have been greeted to a new decline in iron ore, gold, and coal.
Lows not seen since the Global Financial Crisis were once again reached.
Many fortunes were lost, businesses continued operations built off the back unsustainably high commodity prices collapsed, and many predicted this slump as the death knell for Australia’s mining industry.
This fall was driven by shrinking demand out of China, coupled with an oversupply of most commodities in the market as miners ramped up their output in order to take advantage of the higher returns.
Some states backed themselves to the hilt in terms of exports, particularly WA, with nearly three quarters of its exports mining-related, a situation that has now resulted in a $22 billion reduction in the value of its exports year on year.
This over-confidence created a perfect storm for operators as China’s rapid growth declined and stockpiles refused to go down – and miners refused to stop pumping out the tonnes.
Smaller miners were hit the worst, with Rio Tinto CEO Sam Walsh curtly stating: “High prices brought in marginal producers, often based on overly optimistic assumptions and aggressive business models.”
“These tonnes are now exiting the market, which is part of normal supply and demand.”
BHP Billiton chief Andrew Mackenzie defended his company’s and Rio’s ramping up stance amidst the downturn.
“We operate in highly competitive and cyclical markets, where earnings outperformance through the cycle depends on being the most efficient supplier, not supply restraint,” Mackenzie said.
“Any attempt to curtail low-cost supply in open markets only encourages the continuation – or entry – of more costly production. This deprives the market of its power to deliver the most efficient supply.
“Therefore our ongoing success does not rely on supply restraint but instead rests on our foundation of the right commodities, the best assets, operational excellence, balance sheet strength, and capital discipline. A combination of these attributes serves us well during all points in the cycle, but particularly in the current environment.”
For the record, both Rio Tinto and BHP saw share price peaks in 2008, well before the mining boom.
So the markets have crashed, but when will the bottom of this decline be reached?