There is no doubt that mining is a massive part of our local economy. Statistics from the Queensland Resources Council have over 45%of total employment in the region being attributed to the mining industry. What this means is that if the mines sneeze we all catch a cold.
When things are going good in mining there is spending throughout the economy, infrastructure spending, and population growth. When things aren’t going good … well we all remember what the recent downturns have looked like for our region.
Lately mining sentiment has been very mixed with a key factor being coal price. Covid-19 has meant a lot of countries have had major disruption to their economies as they deal with lockdowns and slowing of productivity. This has impacted the demand for steel and energy and therefore the demand for coal has reduced. The balance to that has been some countries have struggled with production meaning supply has also suffered. This culminated in the coal price dropping to $107 USD per tonne in recent months and resulted in a lot of concern around the mining industry.
As countries look to reboot their economies the best influence governments can have is infrastructure spending as it creates positive sentiment, jobs and spending. We recently saw this in our own budget and countries such as China have announced big plans for infrastructure also. This all leads to demand for energy, steel and therefore coal.
The coal price now has trended back to over $130 USD per tonne which is great news but is still lower than prices were back in 2016 during the downturn. The key difference now is the production, cost cutting and efficiencies of the mines allowing them to operate at those prices. But we really do want to see that keep improving to give them the stability they need to minimise cost cutting and ultimately scale up operations.
There are projections that the coal price will keep trending upwards with projections of $135-140 USD per tonne. 1 month ago though the big businesses were doing what-if analyses on $90 USD per tonne by January as that was where the projections were pointing. To complicate things further, coal price is generally set in advance meaning that there is a lag between the coal price change and the impact to the mines.
There are too many variables with coal price as it isn’t just a straight factor of supply and demand and as above there isn’t a magic number with coal price for where it works or doesn’t work for the mining industry. The key here it to understand it and its relevance as it does provide a good insight into what to expect from the industry but as you can see with the changes in the projections things can change very quickly so watch this space.
Off the back of factors such as coal price, trade relations with China, demand for coal we know that there is still a major need for cost cutting so expect to continue to hear stories of price cuts, delayed work, job lay-offs and mine closures. So you need to be agile to be able to adapt if you or your customers are directly affected by these cuts.
Despite all of this it isn’t doom and gloom. There are just as many good news stories coming out of mining with new projects, new mines, new infrastructure and new jobs. In recent announcements there are over 1000 jobs between projects coming online in 2021 and those projects have been factored in based on what the coal price was previously doing. There is significant production and equipment coming in also so there are plenty of reasons to be optimistic despite the need for cost cutting to occur in certain areas.
The other major challenge coming up in mining is payment terms. This is always a key consideration and BHP have recently been advising clients that new POs raised from start of October will be at 30 day payment terms rather than the previous 7 days. We expect this to continue to roll out on a larger scale across the industry as they look to slide out the payment terms again. So you need to be very vigilant with your cash flow particularly around any changes as at some point you can probably expect there will be a period of time you are going without payment as you move from the old terms to the new terms.
There is a lot of volatility in this space without even factoring in the impact this wet season could bring but at ground level there is a lot of positivity in the sector around what is coming up for the industry and the local economy.
What can you do to prepare your business for the next 12months and beyond?
The future is even more uncertain than now so now is not the time to crawl into your shell. Get in and grab your opportunities to make money but be cautiously smart about how you go about it.