“The State of Play in WA - What Will the Stabilisation of Iron Ore and Asset Values Bring?”

Introduction

We saw the price of iron ore stabilise above many economists’ expectations in 2017, and so far 2018 has ushered in further adjustments above $70 US/t. The primary issue facing Western Australia is the lack of industry growth. There are very few greenfield projects in progress or near completion, and it’s unlikely this will change unless the commodity stabilises substantially higher, which is doubtful in 2018-2019. In general, asset values across the civil sector have been softer in WA compared to the east coast, as a result of growth in the construction industry and the coal price resurging in late 2017. This has led us to see a consistent trend in civil assets being sold from WA to the east coast to help satisfy current strong levels of demand, we can expect this continue as long as the construction industry remains buoyant.

Asset Values and Lead Times

Throughout 2016 there was a considerable oversupply of mining equipment in WA and Australia as a whole. In fact, the industry had been in a decline since 2015. Between Q4 of 2016 and the end of 2017, iron ore spot prices stabilised above $60US/t and, as a result, demand for mining equipment grew. Before this increased demand, there was a considerable surplus of mining equipment parked up. However, in the past 12 months the supply has dried up and now we’ve seen it go the other way: and now OEM’s (Original Equipment Manufacturers) are struggling to keep up with increasing quantities of new orders. Consequently, asset values are strong across the board in the mining sector at present. Lead times for large mining trucks, diggers and equipment have reached as long as 12 months or more for some models. We are seeing higher demand in particular for 400T-600T diggers compared to just 12 months ago. This has led to faster sales turnover for vendors, and at premium prices. We see this as a fairly obvious and necessary adjustment to correct the market for used mining machinery after the drastic downturn in 2015-2016. This trend will likely continue for as long as manufacturer lead times are lengthy and commodity prices stay stable, specifically iron ore and coal.

Capital markets

For the last few years, getting capital investments from larger banks was a challenge facing many businesses in the resources sector who were looking to grow. Over the past 12 months, however, there has been a lot of optimism from banks surrounding the resources sector and many banks are looking to lend on new or used mining equipment. We expect this optimism and accessibility of capital will continue throughout 2018 and into 2019.

Conclusion

Asset values in the mining industry are highly dynamic. In order for a valuer to have an accurate understanding of them, they need deep industry knowledge of the factors that are influencing these values. This takes constant communication with OEMs, equipment dealers, mining contractors, and mining operators. That being said, looking to the future we anticipate that iron ore will continue to fluctuate but remain fairly stable, due mainly to China’s industrialisation growth. This should bring in even higher utilisation of mineral explorers over the next 12-24 months as miners plan for gradual expansion. If iron ore remains above $60-$70US/t, we can expect a steady increase in market confidence, while also we expect miners to continue lowering their underlying cost of production in the short to medium term

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