Citi offers a take on the coming cost-out super cycle for resources firms:
A lost decade for the mining industry — We have completed a detailed analysis on the operational efficiencies for mining industry, which points to a strong correlation between operational efficiency and share price performance. Our analysis highlights the wrongs of the past, but also highlights significant future opportunities in the sector.
The depressive facts — Lower operational efficiencies have cost the large mining companies c$35bn since 2005. The industry has seen a >30% rise in unit costs, a 27% increase in the number of employees and a resulting 18% loss in output per employee, together with being hit with a wage bill which has increased by 62% and on average double-digit rises in maintenance and consumables.
The optimistic upside — In a flat commodity price environment, operational efficiency is likely to be a key driver of earnings growth and we calculate it to have a positive 65% impact on 2016E sector earnings. This is likely to be driven by a function of volume growth, improving employee utilisation and better procurement costs. Divergence within the sector is also likely to be greater; we have seen a flattening of the cost curve between 2007 and 2013, but we now expect it to steepen to the period of 2016.
Crikey, talk about glass half full! If commodity prices hold it’ll be nirvana.
Given the increased efficiency that Citi rightly sees as a trend is necessary given the massive over-investment that transpired across the sector for ten years, is it logical to conclude that commodity prices will remain flat? Notwithstanding different contexts for different commodities, the supply surge alone will be enough to ensure further price falls ahead.
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Add in China’s inexorable shift to to slower and lower commodity intensive growth and you have a recipe for a decade long bust in prices that is in its third year.
You can be quite certain that the cost-out trend for major minors will be a big deal for may years yet, but they will very likely be chasing prices and falling margins right along the way.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
