Mining on the up: technology, commodity cycles and the year ahead

As we embark on a new year for the mining industry, what did we learn from the year that was? The mining industry is one that faces the constant challenge of commodity cycles, productivity and a general perception of being an industry that lags behind the progression and innovation of others.

We asked the question, how was 2017 for mining, to Agustín Costa, who is a Partner and Managing Director at The Boston Consulting Group, as well as what we can anticipate for the year ahead.

1) Overall, from a financial perspective, has 2017 been a good year for the global resources sector? - e.g. commodity cycles, rise and fall in demand for metals/minerals, is the industry "on the up?"

2017 has been a banner year for the mining sector with commodities across the board enjoying strong price gains on the back of several factors. The global economic upswing coupled with supply-side reforms in China resulted in a tighter than expected supply-demand balance, particularly for base metals. Crucially, investors and miners are betting that the boom in electric vehicles will significantly boost metals demand and create supply challenges over the medium term. Electric car production is expected to increase more than thirtyfold by 2030, hybrids and battery-powered vehicles will take half of the global market share by that year.

Lithium and cobalt in particular are at the forefront of this revolution given their use in battery cathodes. Shares of companies sitting on these deposits have rallied in step with the surge in prices over the past year (lithium up 34% and cobalt 130% YTD). Admittedly, it remains to be seen if the EV hype is overblown. However, the eagerness of investors to be part of the EV action should continue to support metal prices over the near term as EVs will impact not just lithium and cobalt prices but also copper and aluminum as EVs use a much higher share of those metals.

On the capex front, total spending by the major miners is expected to reach US$41B in 2017. This marks an increase of 7% YoY and a much awaited pickup following a four-year downtrend since 2013. That said, the bulk of this capex is dedicated towards sustaining production rather than expansionary projects. And even those that are expanding remain focused on brownfield opportunities.

2) How has technology transformed the industry? - for example, the rise (and rise) of automation, the use of data analytics and artificial intelligence, what are the major trends from an industry that is perceived to be behind others when it comes to innovation and technology?

Indeed the mining is still behind in terms of innovation and technology when compared to other industries. This is because innovation in other industries is driven by a clear tangible threat to their core business (media, banking, insurance, telco) which is not the case in mining. But miners are starting to realize that there’s tremendous opportunity in bringing the best of industry 4.0 into their business. In that sense, automation will continue to be explored in several use cases (particularly in logistics and mine haulage) but a stronger driver for improved results will come from data analytics and machine learning. Miners are starting to realize that these are low capex innovations that could improve throughput (e.g. using machine learning to boost performance at the mill, like Collahuasi has trialed earlier this year) or increase utilization rates (e.g. using predictive analytics to anticipate mining and plant equipment failures).

3) Predictions for 2018 - what are we predicting for the sector in the 12 months, what is the ideal situation/scenario for the industry? 

While we don’t like to predict industry outcomes, we do see some key themes in the mining industry going into 2018.

First, the rally in commodity prices would lose steam. In the absence of further supply reforms in China, the dramatic change in fortune of many metals has likely run its course considering the severe price moves over the past year. But realities could be different from commodity to commodity and in that sense, 2018 might start to show some divergence in commodity prices trends. For instance, as several union negotiations have piled up into 2018 for Chile and Perú, we might see some supply disruption there that could generate supply shortages and boost prices further. 

Second, growth in mining capex will pick up albeit modestly. The pronounced issue of depleting reserves and falling ore grades in the copper sector is of key concern for miners. Many miners will struggle to maintain their current production pipeline unless they embark on further exploration or growth projects.

Third, we do not see a return to large-scale M&A anytime soon. A pulse check with some of the top leaders in the industry revealed that many of them are skeptical of the value that mega M&A deals can create especially given the lessons learnt during the boom years. Instead, the drive to lift dividends for shareholders will be a key focus. Higher prices enabled the majors to lift dividends by ~130% in 1H17, reversing actions taken in 2016 when several companies scrapped their progressive payout policies or eliminated dividends altogether.