Mining’s transformation in 2016 has been astonishing – although we are not quite out of the woods just yet and it will take time for the improved conditions to filter down the mining chain. After starting the year at the lowest of ebbs and with little sign of hope, a series of subsequent circumstances has seen optimism and fortunes turnaround.
As 2016 began the situation was rock bottom for most natural resources, particularly iron ore and coal, as poor prices, lack of demand, little capital, minimal investment and increasing costs created pessimism. Miners cut exploration and pruned production or closed operations, resulting in widespread job losses.
Gold was again a shining light while there was much hype about the ‘tech metals’ of lithium and graphite driven by the impending electric vehicle boom and the growing need for lithium-ion and other batteries for storage of renewable energy. As 2016 progressed these metals experienced more popularity as demand factors surged with gold also boosted by the shock Brexit decision along with favourable exchange rate variations.
The main driving force behind coal’s upward swing is Asia, particularly China. Throughout the emerging nations of Asia there is growing need for power and while there is more emphasis on renewable energy, the only way demand will be met is through coal-fired power stations. This increases domestic coal demand in these countries but also boosts thermal coal imports from nations such as Australia, Mongolia and Indonesia to make up the shortfall.
Other contributing factors to coal’s resurgence in 2016 were China’s policies to curb pollution and to modernise its coal industry by closing inefficient, costly and unsafe small mines, which reduced production in China and increased reliance on imports, hence boosting prices. There is no guarantee heading into 2017 that these policies will keep driving coal prices up but it is difficult to see prices returning to the lows of 2015 as the need for the policies still exists. Another catalyst for coal, and mining generally, was the election of Donald Trump as US president, who has pledged to rebuild US infrastructure.
There was also a dramatic increase in iron ore prices, catching many companies, investors, governments and commentators off guard. Several theories have been put forward for the surge, including a decline in Chinese stockpiles, less Chinese production, trading machinations and increasing Asian urbanisation, and the answer is probably a mix of all, but miners are making the most of the revival with huge quantities of iron ore coming from Australia and Brazil. There may be a few more bumps in the road this year but the fundamentals remain positive.
Copper’s future looks bullish and many analysts expect demand to outstrip supply in the next few years, which has many hunting for copper assets. Demand will be strong with copper needed for electric vehicles and to deliver electricity to communities in emerging economies.
Zinc came out of copper’s shadow in 2016 with prices rising 60% and the metal looks set to continue shining owing to a looming shortage and the fact that there has been little recent investment in mines. Other base metals have also struggled but the last 12 months has seen a turnaround, which is likely to continue. Nickel has taken a battering but there were positive price movements in 2016, aided by Indonesia’s ban of raw material exports and the environmental crackdown in the Philippines which has seen many operations shut down.
While the prospects for mining in 2017 look brighter, it is important that mining companies learn from the harsh lessons of the past few years - mining must be more sustainable; there must be greater emphasis on CSR and the environment; more focus on discipline and financial responsibility; increased attention to optimisation; and much more investment in new technology and innovations.