The demise of China as a commodities
super-consumer has left the mining industry facing a radically
altered set of demand fundamentals to those that sustained the
last commodities boom until 2012.
Mining analysts at the Mining Indaba 2015
conference in Cape Town, South Africa, said this week that
waning Chinese consumption, the absence of an obvious new
macro-scale demand driver and a significant excess of
production-ready fresh capacity is a major deterrent for
investors looking to convert natural resources into cash.
"There isn’t another China to
come on stream. The landscape looks quite different now,"
Richard Blunt, a partner at specialist mining legal services
firm, Baker and McKenzie, told IM.
He explained that many in the resources
sector have resigned themselves to the funding drought and have
shifted their focus from raising capital to achieving
"Now the music’s stopped,
we’re seeing miners settling down to the
potentially harder business of getting into production," John
Mollard, an Australia-based partner at the firm, said.
||Mollard added that it was impossible to
predict when the market would recover. "All that we can
hope for is that it will be soon," he said.
For bulk minerals like iron ore and coal, looming
additional capacity means that price forecasts remain
bearish. Global seaborne supply is set to rise by 6.3%
this year, against demand growth of just 4%.
According to an outlook released this week by Australia
& New Zealand Banking Group (ANZ), a surplus in the
market could cut prices by 30% to $58/tonne this year, a
figure seconded by Citigroup, down from a previous
estimate of $77/tonne.
Metal Bulletin data showed that prices for 62%
grade iron ore from Quingdao fell to $61.20/dry ton at
the beginning of this week, the lowest since May
|Source: Ming Xia
For niche minerals like rare earths,
graphite, lithium and
uranium with speciality markets, the future also looks bleak as
demand from established markets seems likely to underperform
supply expansion in the near term.
However, some analysts believe that the
growth potential in new markets and emerging technologies could
absorb and even flip the impact of an increase in supply for
"The beauty of these minerals, as opposed
to something like iron ore, is that you have less of an idea
about what’s coming," one fund manager with a
number of niche minerals in their portfolio told
"It’s this uncertainty that,
unusually, still has some appeal for investors. Many
aren’t convinced, but there is some smart money
around and now the market’s down it’s
a good time to see what’s around, and what the
next area of growth might be," he added.
The scope for lithium and graphite demand
from electric vehicles and renewable energy technologies are
appealing propositions for many financiers, however the present
small size of these markets coupled with flat-to-weak demand
conditions in traditional end uses has curbed some of the
investor fervour seen towards these minerals prior to 2012.
Potential oversupply in the graphite and
rare earths markets are particular concerns for investors, one
Asia-based analyst said, pointing to the weight that the
combined production potential of new projects in Africa,
Canada, Scandinavia and Australia will add to the supply
"It’s unclear what this
amount of additional supply will do to a market
that’s only a little over 1m tpa at the moment,"
According to the Asian analyst, lithium is
better positioned to fend off criticism about unrequited
capacity. "Lithium is less of a concern from an oversupply
perspective (…) most of it comes from Chile and the some
of the hard rock deposits look like they’re going
to be too difficult to separate," he said.
By contrast, the issue of challenging ore
separation is a major barrier to investor confidence in rare
earths projects outside China. "Very few companies have shown
that they can get their operating costs competitive with China,
let alone their all-in costs," the Asia-based analyst said.
"The demise of Molycorp is also another
bugbear for those who are struggling to see rare earths as a
savvy investment, even with all the arguments about strategic
resources and moving away from a dependency on China," he
Given the present supply glut situation
facing miners of everything from gold to graphite, junior
miners are bracing themselves for what promises to be another
challenging year for exploration funding.
In terms of re-engaging with the financial
sector, the mining industry has been told it needs to overcome
reputational barriers that have deterred investors from putting
money into it – the most important of which is price
"There is a lot of tiredness over the
volatility of prices between 2008 and 2011 (…), this is
even greater than the fear of price weakness," said Michael
Widmer, metals strategist at Bank of America Merrill Lynch.
He also suggested that the industry needed
to shift its price expectations for inventories of minerals and
metals and adjust to new, more bearish norms.
Regardless of their niche application
appeal, it does not appear that producers of speciality
minerals are any better positioned to access finance than their
counterparts in mainstream bulk commodities.
In addition to lower prices that are
struggling to sustain production costs, traditional debt and
equity funding sources have yet to return to the sector and
alternative sources of cash have been slower to emerge than
some had hoped.
Baker and McKenzie’s Richard
Blunt, said that new funding was starting to come into the
mining sector at large, principally from trading houses,
private and 'quasi-private’ equity, but that there
remains very little in the way of M&A activity.
Graham Dallas, head of business
development, EMEA, at the TMX in Canada, which has around 1,500
mining companies listed across both of its tiers, meanwhile
said that exchange trading will continue to be the main route
by which mining companies access cash for their projects.
"It’s not the best of times,
but it is still a market that functions," Dallas said of the
Toronto market, noting that similar difficulties have affected
the other main mining finance exchanges in Australia and
London, although the drop off in the number of listed resources
companies globally has been less than many had predicted.