Industry Q&A: What does the Rest of 2016 Hold for Mining and METS?
Given the turmoil and change of the first half of 2016, Austmine thought we'd pick the brains of Tim Baker, CEO of Resource Super and get his insights into what lies ahead for the mining and METS industries in the remainder of 2016.
There is a lot of speculation at the moment around commodity prices beginning to bounce back in 2016, after Owen Heggarty’s private equity vehicle EMR Capital has spent its first year buying 6 assets and is into a second round of fund raising now. How do you see the rest of 2016 playing out overall for commodities?
If there is one thing the resource community know about commodity prices are that they are cyclical. Time and time again they over shoot on the high side and on the down side. Most of the bulk commodities that Australia exports are currently experiencing severe downward price pressure, which tends to be the result of inelastic supply side issues. Essentially it takes a long time for producers to ramp up or ramp down production resulting in fairly limited ability for producers to vary their output meaning short term demand side changes lead to disproportionate price cycles.
In terms of our three major export commodities, Iron Ore, Coal and LNG: The China story continues to be the major story coupled with significant increases in production capacity over the past decade to meet spot demand. The 13th Chinese Five-year plan includes a target of an additional 5% of their population migrating from rural to urban environments or roughly 180 million people in the coming 5 years moving to cities. This will require vast amounts of steel and concrete. In addition, China are currently building 126 new coal fired power stations which equates to roughly 400 million tonnes per annum of incremental new coal which is equivalent to Australia’s entire annual export capacity. And that is not taking into consideration the additional 177 new coal fired power stations that India are currently constructing.
So I suspect the price cycle is here to stay.
Mergers and acquisitions tend to increase at market times like we are in now. Do you see this being the case for the next 12 months? Will this be the same for both the mining and the mining, equipment, technology and services (METS) sectors?
M&A frequently occurs towards the bottom of the cycle as producers find themselves in a position as a forced seller. We saw this in the gold sector with significant assets sold to domestic players who were able to leverage their marginal cost differential and currency advantages. This is also playing out in the LNG and Coal sectors at present.
It is highly likely we would expect to see this in the METS sector as strong, well-capitalised businesses take the opportunity to broaden their foot print.
We would also expect to see additional consolidation in labour hire groups with fewer large scale projects being undertaken in the coming 12 months.
Part of what you offer through Resource Super is tied into employee wellness. During the last boom, the skills shortage was an enormous challenge for miners and METS alike. Why should companies be using these quieter times to focus on employee retention and wellness? How can they do this?
We recently held an event in Brisbane for leaders in the broader resources sector on the topic of ‘Abundance mindset versus Scarcity mindset’. We are all aware of the predicament that miners and METS face at the moment however it is a matter of how we choose to respond during these challenging times. We can either dwell on the issues at hand or take the opportunity to rethink and re-evaluate.
A focus on employee wellbeing and retention is just as important as the future growth and development of companies. What we don’t want is to be complacent and have our people say goodbye to the industry all together and have no hands on deck when the markets turnaround.
Leaders in the industry understand the idea and benefits of offering an employee wellness program. However, with stretched resources, this often seems like a feat they cannot achieve.
We can start small. Low cost initiatives such as a survey can help you put your finger on the pulse. How are your employees feeling? How are they responding to the changes happening within the organisation and the industry?
Can you set up de-stress zones? Or on site services such as educational workshops to help employees manage stress and their finances. There is a wealth of information out there to help you get started. We can of course assist in this space.
With many miners changing payment terms at the moment, smaller METS are facing tough cash flow situations. What should METS be doing to manage their internal cash flow and ensure their business remains competitive and sustainable?
It is important sound financial controls are put into practice for METS companies to not only remain competitive and sustainable, but also strategically manage and steer the business in the context of volatile external market conditions. Simply looking inwards and relying on historical data and spikes in demand will only cause harm to the business.
Forecasting is something we all love to hate, however incredibly useful if we take into account the operating environment impacting customers and therefore the business. Decisions-makers are more likely to make realistic and informed decisions to ensure the business is sustainable and set up for future growth when markets improve.
Resource Super is a financial wellbeing solution for employers and employees of the Australian Resources Sector, dedicated to providing tailored superannuation and insurance benefits. Their understanding of the resources sector and unique approach to financial wellbeing enables them to design and deliver a plan for workforces right across Australia. See more information on their website.