Mining suppliers hit by fall in demand

The decade-long boom in the mining services industry has come to an abrupt end as a pullback in mining investment reduces demand for equipment such as trucks and shovels, putting pressure on companies such as Caterpillar.

For the past 10 years miners have struggled with soaring cost inflation and long waiting periods for equipment and teams of engineers, as companies raced to dig new mines to meet the voracious demand from China and the rest of Asia.

But as companies such as BHP Billiton and others now start to cut back spending, executives told the Financial Times that the cost of equipment and services was starting to come down.

“We have seen contractor rates in particular starting to go down, rolling back some of the unsustainable cost increases of recent years,” said Tom Albanese, chief executive of Rio Tinto.

Richard Adkerson, head of US-based copper miner Freeport-McMoRan, added that cost inflation had “come down a little bit”.

The largest contractors for the mining industry include Bechtel and Fluor of the US, Leighton of Australia, Weir Minerals of the UK and Hatch of Canada.

The pullback in mining investment has been a key topic of discussion at LME Week, the annual gathering of the metals and mining industry, with traders, bankers and investors debating whether the slowdown in projects will be enough to offset the relatively gloomy outlook for demand as China slows.

Mining executives reported greater availability of equipment as projects were cancelled or deferred.

Thomas Keller, head of Codelco of Chile, the world’s largest copper producer, said waiting times had “improved significantly” and that “we would expect suppliers to start reducing prices”.

Mike Henry, group executive at BHP Billiton, added that the waiting period for the delivery of trucks, had fallen from “multiple years to a few months”.

The comments bode badly for groups such as Joy Global, one of the biggest manufacturers of shovels, and Caterpillar, which in 2010 bet big on the sector by buying Bucyrus for nearly $9bn.

Doug Oberhelman, chief executive of Caterpillar, last month said the business was “soft right now”, calling the recent years a “bubble”. Caterpillar cut its earnings outlook to 2015 to $12-$18 a share, down from $15-$20 a share previously.

Joy Global also recently reported that its orders were 25 per cent lower in the three months to the end of July than in the same period of last year.

Mining executives said exploration service companies were particularly suffering as junior companies cut back on their spending due to lack of financing. Diego Hernández, chief executive of Antofagasta, said: “In exploration, there was a lack of drilling equipment. Now you can secure long-term contracts at reasonable prices.”

Komatsu and Hitachi of Japan, Stockholm-listed Atlas Copco and Sandvik, and Sydney-listed Boart Longyear are also among the top manufacturers in the sector. Others impacted are likely to be groups such as FLSmidth and ABB, which produce specialised mining equipment.