Cautious optimism in the mining industry: In year 2017, miners were seen to take sweet-spots considering the commodity price scenario. Key commodities reached their high levels and boosted many resource sector stocks. For instance, copper had hit three-year highs while coal, gold, and iron ore prices were also seen surging up and this boosted the benchmark S&P/ASX 300 Metals & Mining Index to about 20% in early October. Major miners including Rio Tinto (ASX: RIO) that moved up over 35% in last one year, were seen to be enjoying the gains. These movements reinforced the industry confidence and led to an augmented exploration activity. Amidst the scenario, many ASX debutants in resources sector were also seen to get a lot of attention. It has been now predicted by Commodity forecaster CRU that prices of most of the 36 commodities (including copper and zinc) are set to increase through to 2020. However, structural changes in China can still pose some challenges for the industry.
The resources sector has made a significant contribution to Australia’s economic position over the last decade and the sector now operates within a highly competitive globalised environment with a cautious optimism building up, as most of the commodity prices seem to have been staying around the higher side of the cycle. However, along with macro level issues, challenges to technological disruption and other environmental issues are now creeping in. The companies that operate in iron ore or thermal coal, for example, have an entirely different outlook than those heavily weighted in precious metals. Particularly, iron ore seems to be having 2017 as a volatile year, with strong rallies of the past followed by sharp reversals. The latest drop in iron ore prices was linked to changing landscape on Chinese steel production and demand scenario, especially in the light of mill closures as part of efforts to improve air quality ahead of the major conference of the ruling Communist Party, commencing on October 18. The diversified miners typically face different types of challenges than companies with a niche commodity focus. Moreover, the focus on shareholder value has sharpened up than ever before, with return on invested capital considered a key metric. The growth strategies of the companies are now transiting to mine expansions, strategic acquisitions or divestments and productivity improvements.
Also, in the past decade, the movements in commodity prices have induced massive mining investment and large increases in mineral exports while creating over tens of thousands of new jobs in the sector. While the shift from the mining boom might be occurring from economic standpoint, the mining/resources sector is still expected to play a fundamental role for the Australian economy’s framework, at large, looking into the future with evolving industrial landscape and international trade opportunities.
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