Bank upbeat about mining sector in 2017, predicts steady commodity price uptick

JOHANNESBURG (miningweekly.com) – Given that the global economy is expected to grow by 3.4% this year and 3.5% in 2018, the health of global macroeconomics is good, which bodes well for a resurgence in the global mining industry during the course of this year.

This is according to Standard Bank mining and metals research head Tim Clark, who was addressing a media briefing on Monday ahead of the Investing in African Mining Indaba, which will be held from February 6 to 9, in Cape Town.

Clark highlighted that the Chinese economy was expected to grow by 6.5% in 2017 and 6.3% in 2018, off a very significant existing growth base, which he said was an additional promising sign for the global mining industry. “This was not the outlook that had been predicted in recent years, as analysts feared that there would be a slowdown in the Chinese economy,” Clark noted.

He also pointed out that India also continued to perform strongly, with its economy predicted to grow by 7.6% in 2017 and 7.7% in 2018, owing to the Indian government’s supportive regulatory changes in recent years, which were sustaining the country’s economic successes.

IMPROVING EFFICIENCIES
Clark commented that, generally, mines were well positioned in terms of their cost curve positioning (relative to long term averages) at the start of 2017. The only major exception was the nickel sector, which was “fairly deep” in the cost curve at 63%, which he explained was largely owing to the Indonesian government’s recent decision to lift its three-year ban on the export of unprocessed nickel ore.

Clark pointed out that, for example, iron-ore’s cash margin in October 2015 was at 16% on average, on the fiftieth percentile of the cost curve, while currently it was at 62%. “What this is saying is that margins have risen substantially and that the global mining sector is in a much better position from a cash flow perspective than it has been in the past two years,” he explained.

Additionally, Clark noted that in October 2015, iron-ore was in the seventieth percentile of the cost curve, which meant that 30% of iron-ore mines were lossmaking operations. However, currently 100% of iron-ore miners were generating profits, he said.

“This is a clear indication of the improving operating climate for mining companies.”

Clark commented that this was among the “known miners”, elaborating that there were still smaller, usually unlisted companies, that had closed down their iron-ore mines owing to operating challenges and low iron-ore prices in recent times.

COMMODITY PRICE PERFORMANCE
Meanwhile, Standard Bank Africa corporate finance mining and metals head Sandra du Toit pointed out that all the major commodities had declined in US dollar terms over the past five years.

“Of the five commodities that we analysed namely gold (-22%), platinum, iron-ore (-31%), copper (-32%) and coal (-20%), platinum declined the most as it was down 33% over the past five years,” she stated.

However, she said the weakness of the rand over the past five years had, in many instances offset the low commodity price environment with coal (36%), platinum (14%), copper (10%) and gold (32) having achieved substantial gains on rand-based price terms over the past years. The only exception was iron-ore which declined by 10% over the past five years in rand terms.

Further, she said Standard Bank had rebased its price forecasts for the fourth quarter of 2016 and its spot prices to compare the institution’s relative views on prices.

Du Toit commented that relative to the fourth quarter of 2016, Standard Bank was “bullish” that base and precious metals prices, particularly copper and zinc, would improve steadily from 2017 onwards.

She also contended that conditions were, once again, favourable for investment to return to the mining sector as the industry had largely weathered the headwinds it had faced over the past five years.