Commodity prices savage mining services sector
24 February 2015: Tough market forces are making life just as tough for mining services operators – and have savaged Deloitte’s Q4 2014 Mining Services Index.
Compared to the Q3 2014:
- The Index declined by 6.74 points ($3.12 billion market capitalisation) to 68.59 points
- The ASX 200 increased by 2.89 points to 132.15.
Deloitte Financial Advisory Services partner Nicholas Harwood said: “Falling iron ore prices and the dwindling pipeline of new projects are well documented. They are impacting miners in terms of profitability and market capitalisation, and these impacts are, not surprisingly, also being felt by those in the mining services sector.
“In Q4 2014, there was some improvement in sentiment towards the top 10 participants (which comprise 84% of the Index), with the market capitalisation of five improving and five deteriorating.
“The net movement in the market capitalisation for the top 10 participants was a decline of $1.2 billion relative to total Index market capitalisation of $31.9 billion. This highlights that the deterioration in the Index was caused as much by the top 10 participants as by the other 40.
“While some Index participants reported revenue increases, and initiatives to reduce costs and improve productivity, market forces and competitive pressures have caused many to suffer reduced margins and larger profit swings relative to revenue movements.
“If there is an upside, sustainable cost reduction initiatives, diversifying business activities, increasing cash management and debt reduction, and expanding capability through organic initiatives, acquisitions and alliances are driving change.
“Continued pressure on the sector can be expected to lead to an increased number of transactions and some opportunistic merger and takeover offers.”
Deloitte Access Economics partner Stephen Smith, who provided macroeconomic analysis for the Index report, said: “Our mining services sector is dealing with increasing uncertainty around new projects, with access to capital proving difficult, and explorers experiencing delays to expectations for the timing of approvals.
“Much of the industry has implemented cost reduction initiatives, but more needs to be done, to accelerate sustainable change through this phase of the resources cycle.
"The US economic recovery, among other factors, is driving a weakening of the AUD/USD exchange rate which, on balance, should be beneficial for the industry.”
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