Consultant’s Comment: Mining equipment and transport outlook

By Dmitry Przhedetsky*

Some contractors currently have fleets which are now underutilised. Nevertheless, the long term perspectives are very positive and set to take off as soon as the economy stabilises.
The demand for mining equipment may outpace supply much sooner than anyone is thinking at the moment. The grounds for the increasing demand for mining equipment during the proverbial “mining boom” a few years ago were quite real with:
. rapidly increasing demand for minerals in the developing countries;
. shortage of the energy resources and the necessity to mine more alternative energy resources (e.g. uranium sand);
. ever increasing complexity of mining operations due to depletion of current deposits; poorer new deposits; implementation of the tougher safety and environmental standards in all countries, especially in developing countries.
None of the above reasons have disappeared during the current financial crisis. And when the market for mining equipment revives, there will be many new opportunities even for newcomers. There will be fierce competition between manufacturers, which should dictate lower margins on capital equipment in order to gain/retain a market share.
There will be more suppliers from China, India and Eastern Europe entering the mining equipment markets previously dominated by just a few “traditional” suppliers. Many may adopt the policy of selling equipment almost at cost to penetrate particular local markets and to secure parts and service business as the profit source. Also, there should be more interest from the OEMs in service contracts or performance contracts.
Even if the situation with undersupply of equipment comes back, everyone will be fighting for an order, as a firm order for a deferred sale is almost as good as an immediate one. There is still a potential for higher margins/niche markets for flexible and forward-thinking suppliers.
Once the commodity prices rebound, many mines will be re-opened and the large producers will resume expansion. Also, both Federal and State Governments will consider simplifying the approvals process for new mining projects and/or particular commodities along with other measures to secure a sustainable income in the future. New policies may enable more exploration activities, in New South Wales in particular.
OEM equipment finance options, leasing, rentals, profit sharing and other forms of alliances with mining companies and contractors are most likely to become more popular due to shortage of cash and difficulties with project financing.
Many OEMs have been reluctant to act on this matter, seeing a threat of “crossing the line” and starting to compete with their existing clients. In some very specific markets it may be a viable alternative though. Also, one needs to know the specifics of the financial management of most mining companies. An average mining company may justify maintenance or rental expense times more easily than the same amount for a capital purchase. In other words, it may be simpler for a mining house to pay a percentage more per tonne if the equipment is contracted.
In regard to new versus second hand equipment, there is a chance that OEMs could get more involved now. Previously they may have seen this as a threat to their core business, hence some entrepreneurial small contractors episodically imported cheaper second hand equipment from other markets. Also, some companies have been successful in providing service exchange and certified rebuild services.
Depreciation rules often prevent users from spending large amounts of money on the second hand equipment and reconditioning it, so one of the niches may be reconditioning of equipment by OEMs and selling it as refurbished with full warranties.
There are a whole range of factors which influence the demand for mining equipment, from the performance of commodity markets to the price of freight and number of new mining companies listing on the Stock Exchange. But there are opportunities even in this downturn for suppliers and OEMs and it would be wise for them to consider how they could optimise the development and customisation of equipment to match the particular needs of the industry and the community.

* Dmitry Przhedetsky (M Eng (Mining), FAusIMM) is a director of Rock Cognition Pty Ltd. Contact him at: dmitry@rockcognition.com.au