“There is nothing that concentrates the mind more than a fall in your market,” one veteran executive said. However, he pointed out that such events littered the mining industry’s history.
A number of steps could be taken – though not, it is acknowledged, easily – to ameliorate the effects of the downturn in commodities, Ord Minnett’s Peter Arden said.
Companies should try to improve the quality of their contracts, particularly seeking long-term arrangements, and of course pursuing the bigger, more resilient customers.
Producers should seek mergers, or at least try to share facilities – critical mass would be important in ensuring survival.
However, Arden believes the resources industries are “in reasonable shape” compared with three or four years ago.
He said one benefit of any cooling in the resources boom would be an improvement in the quality of the workforce.
Companies have been forced to employ poorly qualified people during the years of labour shortages. With the pressure off, this can be reversed and there can be efficiency improvements as a result.
Arden said he expected Chinese economic growth would not decline for long – the massive program of investment in infrastructure, massive financial reserves and its awareness of the risks of social upheaval should ensure that growth remained strong.
PricewaterhouseCoopers resources leader Mike Heppell said while the bigger miners with low-cost assets should cope with the upheaval, mid-sized companies faced greater challenges.
He foresees some mid-sized companies seeking to solve funding problems with mergers, very likely with Chinese firms.
Heppell said Australian companies should closely analyse the reliability of critical suppliers – it is no time to take them for granted. Hedge strategies are another area that might need attention.
He said miners should adopt a more vigorous posture with their banks, presenting their case in the best possible light. In the past many have been reactive rather than proactive.
The Marketing Centre managing director Mike Smith said producers should pursue buyers more closely aligned with their product, ensure they would be sound partners in the arrangement, and closely identify markets fitting their product’s specifications.
In recent times, when there was a hectic demand for commodities, making the best fit with a buyer was less important. Those days have passed for now. Pursuing the best markets is again vital. For example, a company’s metal may be better suited for one purpose than another.
Buyers can be wooed with greater care taken to ensure inventory efficiency, or technical details and specifications.
It will also be important to give attention to a company’s investor base – shareholders’ loyalty will be crucial if there is a need to raise more capital.
Smith endorsed Arden’s comments about beefing up the workforce. He said more people would be looking for jobs as the resource industries’ expansion was checked. This could be an ideal time to improve a company’s level of expertise.
Smith said there was scope for more collaboration between companies with common interests, to ensure the most competitive position for local producers.
Several analysts pointed out that the panic selling of mining shares had cast a shadow over the fortunes of the industries serving mining companies, such as engineering. However, they noted that the considerable backlog of confirmed projects gave them significant breathing space.
Broking firm Hartleys said this would keep the contractors working for at least the next two years, and involve spending $57 billion – with $18 billion in 2008.
This takes no account of $100 billion of infrastructure spending said to be in the pipeline.
The analysts acknowledge that if commodity prices remain low for a long period, there could be a decline in the supporting industries’ fortunes after 2010. Some have reduced forecasts of companies in this sector by 10%, from 2010, to allow for a slowing in orders from then.
Hartleys warns that as commodity margins narrow, project operators will be more cost focused and risk conscious.
Operating efficiency will be more vital than volume turnover for mining contractors to sustain earnings. Maintenance providers should take heart though. The massive spending on mining projects since the start of the commodity supercycle four years ago means an emerging opportunity for maintenance businesses.
Contractors with higher operating margins, scale, efficiency in project management and good market reputation are more likely to tolerate margin pressures.
Less efficient contractors will become takeover targets or shrink to make themselves competitive on projects that tend to be fewer in number but larger in size. The asset backing of companies may become more important as skilled labour is more available.
Hartleys said that under difficult economic circumstances, net tangible assets (viewed as break-up value) could be the vital reference point when earnings were under pressure and became less reliable. Companies trading at significantly above asset backing are at risk of further share price falls.
Export Finance and Insurance Corporation managing director Angus Armour said anecdotal evidence suggested credit was still “very tight” for most companies. However, mining companies with good reserves and good cash flows “were not suffering too much”
One element of the current downturn that might be overlooked is short-term credit. Payments are being delayed, which imposes extra strains on companies’ balances.
EFIC’s own research shows that among exporters, 29% believed finance was a key barrier to their international growth. More than half said access to additional debt funding would enable them to grow faster in their current markets.
EFIC, as Australia’s export credit agency, helps Australian businesses great and small to expand their export business by providing specialist finance and insurance services.
However, it has found that in a tight global credit market, even profitable, experienced exporters from the mining services sector are having trouble getting the working capital finance they need to keep exporting.
The corporation helps exporters when the private market lacks the capacity or willingness, filling the “market gap” on a commercial basis.
EFIC may take risks that banks cannot or will not take, based on detailed risk assessment.
The impact of the credit crisis is obvious, EFIC has found, through the increase in enquiries for project finance.
It offers a number of solutions. For example...click here to read on.