The future for mining services
Keep calm and carry on… or shift to gas?
Many industry services operators that rode the upcycle hit challenging trading conditions starting in early 2012 with a delayed effect in Western Australia. Miners are resuming pre-stripping of overburden. Deloitte’s Positioning for prosperity? Catching the next wave report sees the gas sector as a major growth driver for the Australian economy over the next 20 years.
With the miners transitioning from the construction phase of the commodity super-cycle and onto the production boom, many industry services operators that rode the upcycle hit challenging trading conditions starting in early 2012 with a delayed effect in Western Australia.
Capital expenditure projects have either been downgraded or deferred. Mines face closure, workforces face layoffs and supply chains face intense scrutiny. Miners are subjecting their suppliers to sourcing exercises, tighter panels, limited product choice, longer procurement cycles, actions against aggressive claims, post contract reviews, and more vigorous tenders. We anticipate that this will continue in the near term.
Australian services companies, saddled with eye-watering costs and low equipment utilization rates, face financial hardship, with earnings at risk given their exposure to a single industry with a narrow commodity range and imposing austerity measures.
Consider the coal situation in Queensland. Coal production at any cost, a high Australian dollar and high mine cost structures have led many mines to become uncompetitive and loss making. As a result, and since 2012, the State’s coal industry and associated mining services companies have been undergoing structural change aimed at right sizing their operations and resetting at a new cost base. Miners are taking advantage of convenience clauses, not extending contracts, tightening procurement functions and pulling services back in-house.
and carry on......
However, we are seeing early signs of improved operating conditions in 2014. Miners are resuming pre-stripping of overburden. Run-to-fail maintenance strategies have been implemented to reduce maintenance and shutdown spend, however they can only last for so long. Increasing coal volumes are passing through ports and new service contracts, albeit at very competitive rates, are slowly being issued as mines increase or recommence operations.
We expect consolidation opportunities in the next few years that will reduce the overall number of companies, creating more multi-service, multi-mine operators and lower cost bases and achieve economies of scale.
... or shift to gas?
Deloitte’s Positioning for prosperity? Catching the next wave report sees the gas sector as a major growth driver for the Australian economy over the next 20 years, so moving into the gas field services industry could represent a 20-year golden opportunity to utilize smaller yellow equipment and field vehicles to improve trading volumes and margins.
But wanting to operate in the gas field sector and being able to do so are two quite separate issues. Companies need an entry strategy, robust safety procedures and the right resources and equipment.
First, what is the strategy and entry point into the market?
The gas services industry is currently a fragmented one, with three-four tier one players, a handful of tier two companies and a large group of tier three companies spread over a large geography. Selection of an operational base requires some planning as gas fields will move further into gas basins over time. Considering the value chain from gas fields to the three LNG plants on Curtis Island in Queensland, where might a mining services firm see itself playing?
Second, does the operator have a clean safety record and experience in dealing with gas?
Safety is a ticket to play in the industry. Methane is odourless, colourless, explosive, and can asphyxiate. It is inherently more hazardous than coal, ore or minerals, and conventional mining safety practices are not sufficient. Demonstrating a ruthless focus on field safety across a large geography is a significant challenge and a minimum requirement.
Third, what investment, and what return, is required?
For Queensland's gas projects to meet their required returns and add additional capacity, field service operators must run on a low-cost, high-productivity model. Attracting higher margins will only be available for niche and highly specialised operators. Some existing mining services equipment may be repurposed, particularly for well pad and access purposes, but most other services areas will require additional specialised equipment. If mining services operators are looking to gas to improve margins, their expectations may not be met.
So, keep calm and carry on mining services, or shift to gas.
For the right services company, in the right location, with the right kit and with the right safety performance, gas field services represent a real opportunity.