Focus: Downturn deeper and longer than expected

Mining companies in Latin America suffered another harsh year in 2015 as prices of the most important metals produced in the region fell lower and for longer than had been anticipated. In July and August, prices of almost all major commodities crashed, with many at lows last seen during the global financial crisis.

The extent of the downturn and the bleak outlook for 2016 in the copper segment became evident in Q3 with a series of production cuts. As of September 30, copper companies had announced curtailments of 429,667 tonnes (t) for 2016, but even that was not enough to revert the price or the overall sense of pessimism.

"The production cuts will not result in a price rise, but will set a floor for the copper price which will probably move in a range of US$2.1-US$2.7/lb in 2016," says Juan Carlos Guajardo, executive director of Chilean consultancy Plusmining.

The slowing Chinese economy is the principal driver of the gloomy outlook. China, which accounts for around 50% of global metals demand, is transforming from an investment-led to consumption-driven economy, and the changes that this is incurring are curbing growth. "A good part of the Chinese slowdown is due to the severity of the application of the government's reform agenda... it has made decision-making extremely slow and the general restructuring has created uncertainty," says Guajardo, who is also former executive director of Chilean think-tank Cesco.

Uncertainity in China has reverberated loudly in Latin American mining. Credit: AFP

China's systemic change to a market-orientated, consumer-driven economy will create several years of uncertainty and volatility, directly impacting Latin America's metals exporters. The pain will be assuaged somewhat by the collapse of these currencies against the US dollar, helping to reduce costs. Lower oil prices have also eased the cost base in the metals segment. However, in July, the IMF revised down its 2015 and 2016 growth forecast for Latin America and the Caribbean to 0.5% and 1.7%, respectively, due to the impact of lower commodity prices and the rebalancing in China.

China's cooling off is structural so the smart mining companies are responding with their own structural adjustments to ensure greater resilience to external shocks. The portfolio reviews, asset sales, mergers and partnerships seen in recent years will continue in 2016. The lower market cap in the industry should trigger M&A interest, although the approach will continue to be one of caution. At mining operations, the quick wins of cost cutting are reaching a limit and producers are looking to embed productivity improvements. Many companies are investing in new studies for projects to improve economics in a scaled-down, phased approach to development.

Few companies are brave enough yet to be preparing for the growth that will inevitably emerge in this cyclical industry. "It is very difficult to adopt countercyclical behaviour," Guajardo says. "It is always more urgent to cut costs, and postpone projects when shareholders are demanding returns."

Global exploration spending in 2015 is set to fall 20% year-on-year to a little more than US$9bn, the third consecutive annual decline after hitting an all-time high of US$21.5bn in 2012, according to SNL Metals & Mining.

"As the year has progressed, our 2015 outlook for exploration has been downgraded," says SNL Metals & Mining director Jason Goulden. The previous forecast, made in April, was for a decline of 10-15% to US$10bn.

The outlook for 2016 is for a further decline. "Given where we are today, I feel we're in line for another decline next year, led by the juniors," Goulden says. However, it will be "a more modest drop than what we've seen over the past few years as we expect the major and intermediate producers to maintain spending levels."

Figure: Global Non-Ferrous Metals Exploration Spending

Figure: Copper Production Cuts


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