Trade Dispute and Market Uncertainty Will Pass
Last year at this time, we were talking about how great the copper market looked. A perfect storm was in the making, one where stocks were low and falling, prices were rising, which is good for miners, but not necessarily the consumer, and rosy forecasts offered several reasons to be optimistic. Then, the trade rhetoric between China and the U.S. put copper and most of the other mined commodities in a holding pattern. This now seems to be a reoccurring theme for May.
Unlike the trade dispute between the U.S. and Canada, which impacted two countries and specific metals such as iron ore and aluminum, the discussions between the U.S. and China have greater macroeconomic implications. The fear is that protracted negotiations or an escalation in tariffs could slow Chinese growth. The two largest investment areas for mining are iron ore and copper and China is the primary consumer for both of these metals. If the Chinese economy cools, many believe demand for these metals and other mined commodities will also decrease. This will impact several countries and multinational miners.
Many mining companies are already prepared for this. The difficult years that followed the most recent slump in metal prices forced many mining companies to review their profiles. They sold non-core assets and improved their balance sheets. They bought back stock. Now they are seeking to transform performance organically through productivity improvement.
Rio Tinto, for example, recently announced a 5-year, company-wide productivity improvement program that is focused on creating a culture of working smarter. It believes that plan, which it is implementing today, could generate an additional $1.5 billion in free cash flow each year in the future. To get there, they are gathering and leveraging their expertise with asset management and infrastructure, ore body knowledge and automation (operations technology). Similarly, Teck Resources through its “Ideas at Work” program is identifying the ideas that have the greatest potential to improve its operations and then applying them across their business, which ranges from base metal to coal mining in several mining districts. They are looking at practices that strengthen safety, enhance sustainable performance, improve productivity and help grow the business.
Many other large mining houses have similar productivity improvement programs that consider smart mining with sustainable goals. In addition to a better work environment, the gains that these programs will make will ultimately improve processes and lower the cost of the product, which will help companies sustain the business during lean periods and improve profit margins when prices trend higher.
Mining is a capital-intensive business with projects whose lives span 20 years or more. Change happens and that can be factored into investment decisions as mining companies adapt. The tension that will develop as President Xi Jinping and President Donald Trump negotiate a new trade deal will cause some short-term anxiety in the boardrooms of many mining companies, but it’s important to remember that long-term mining projects require commitment and a steady hand. When they reach an agreement, demand for mined commodities could begin again at an accelerated pace and those with a long-term vision will reap the rewards.
Steve Fiscor, Publisher & Editor-in-Chief, E&MJ