Mining Indaba ’15: There is no new China to come on stream

By Laura Syrett
Published: Friday, 13 February 2015

Miners are coming to terms with the need to adjust to new supply-demand fundamentals as Chinese consumption slows and no other emerging economy looks in a position to fill the void. While headline demand indicators like iron prices ore are expected to suffer, some believe that speciality minerals such as graphite, lithium and rare earths may be cushioned by new and expanding pockets of growth, although access to funding remains tough across the board.

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 operational goals.

"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.

China construction_Ming Xia  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 2009.
Source: Ming Xia

Speciality minerals

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 specialities.

"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 IM.

"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 side.

"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," he said.

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 added.

Financing projects

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 fluctuation.

"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.





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