Although 2016 was a year of volatility, the resources sector in parts has seen a rebirth, evident with definite market and business operation shifts moving into 2017. While lending, commodity prices and equipment values may not be to the level we’ve seen previously, recent spending trends show we’ve entered another interesting, but unfortunately volatile, period.
If there’s one takeaway from 2016, it’s that the decline of coal is over and the commodity has bottomed out. Coal took its largest ever hit in 2015, due primarily to a drop in demand from China. However, twelve months on, mining giants are looking at many of the sites that were mothballed when prices plummeted, and demand for the commodity is expected to remain stable. Iron ore prices have been boosted by rising coking coal prices, with record twelve-month highs for both commodities.
Looking to 2017, some Australian miners are predicting short-term negative impacts as the United States transitions into its next presidential tenure and the uncertainty regarding China’s mining restrictions. The consensus view among commodities experts is still that demand will strengthen next year triggered by brighter prospects for prices of energy and base metal commodities.
Lending and Spending
While the downturn affected many owners and operators, reducing their capacity to borrow, the amount of ‘bad debt’ carried by the banks also impacted mining contractors and ‘services to mining’s’ ability to raise funds. No one could escape the impact of the downturn – so when The Reserve Bank declared the end of the mining bust in November, Christmas had come early and some confidence was renewed. The bank observed that the recent rally in coal and iron ore prices had lifted Australia’s terms of trade for the first time in more than two years with further gains expected.
With that said, one aspect we’re all watching closely is the impact of the Chinese Government’s restrictions on coal mining and slower production. Typically this could create challenges for our Australian exporters, but as we have some of the lowest production costs in the world, we’re still very much in demand, especially with the premium coking coal reserves we hold.
No one in the industry wants another big boom. The industry wants steady, consistent growth, but the fear of the unknown as we head into 2017 see’s lenders maintaining a cautious approach with how much and where they put their dollars. The challenge now is to move past the doom and gloom story that financiers have held onto and reveal the new opportunities within the market as more coal contracts come up.
The previous 12 months saw tighter bank lending, a decrease in exploration and the end of the construction phase for many sites, pressuring some of the largest mining companies to sell assets to reduce debt and improve cash flow. The ‘run to fail’ ethos coupled with no capex created a very unusual landscape. Conversely, small to mid-tier asset owners were forced to hold gear for longer and run machines they would have rebuilt or replaced on site at the height of the boom. For contractors, work will remain with some mid-scale contracts up for grabs in the hot spots like Bowen Basin and Hunter Valley that will continue to need equipment.
Our valuations team has been challenged over the past year, with some asset classes reporting strong, rapid growth while others continue to erode in value. Hassalls’ proximity to the resources sector has allowed us to pick up the smaller, often overlooked details that can substantially influence asset value over time.
In terms of buyers, we are seeing smaller construction players and beef farmers looking to upgrade their stock making up the majority of bidders at our auction yards across the country, particularly in Queensland. One example of this is our work on the Curtis Island Dispersal Project in Gracemere, which consisted of ten auctions in 2016 where we sold more than AU$50 million of second hand vehicles, storage containers, miscellaneous scrap and other construction equipment. Assets including +200T haul trucks and +300T diggers have incurred significant increased buyer demand due to renewed interest in coal, however high-houred, old equipment is struggling to attract buyer interest.
With uncertainty in the US, LNG demand increasing on the east coast of Australia and China likely to hold its mining restrictions until March, 2017 indeed has a question mark over it, albeit with early optimism.
If commodity prices continue to soar as predicted, we could be in for a return to strong growth across the coal and gold mining sectors. This renewed confidence along with a growth in LNG production, should see more jobs and lending capacity increase.
If China’s restrictions on mining relaxes, Australia’s role could be seen to either drive their mining production, or alternatively, no longer be needed as we are now. However, the resources industry has grown accustomed to operating lean and reducing waste or excess spending. The challenge will be to maintain this mindset through an improving economy to yield the greatest profits.
Overall green shoots are appearing in the resources sector and there are positive stories to tell. But whether you’re buying or selling assets, lending or streamlining operations in 2017, a conservative approach appears to be the norm throughout this volatile industry, which is likely to continue.