Digging up trouble

The commodities boom is well and truly over and a prolonged global recession will weigh heavily on the mining services sector.

IBISWorld estimates industry revenue will grow at an average annualised rate of 7.1% over the five years to 2008-09. As the industry’s key activity is contract mining, the mining services industry is highly affected by the trends in mining activity.

Net profit before interest and tax is expected to expand more slowly, reflecting strong growth in employment, the bidding up of wages in response to labour shortages and higher levels of capital spending and therefore depreciation.

Rising minerals prices and strong demand for a range of minerals in the second half of 2003-04 and 2004-05 revived contract mining activity in 2004-05. Although mining activity expanded strongly during most of the current performance period, the industry was largely affected by the global financial crisis in 2008-09. Weak growth and recession in many developed economies is reducing the demand for minerals and leading to output reductions.

IBISWorld forecasts that industry revenue will grow at an average annualised rate of 1.3% over the five years to 2013-14. Performance will be uneven and falls in revenue and profit are expected until 2009-10, followed by moderate growth. The growth is much more modest over the outlook period than over recent years, reflecting slower global growth, generally weak mineral prices and, in the early years, continued tight financing conditions for the industry’s clients. Also the hard rock mining and the contract mining sector’s mainstay will not expand as quickly as in the past.

The gold mining sector, which contributed greatly to the early growth of contract mining, is expected to provide steady work during the outlook period. Rise in the gold price is creating interest in the metal and this translates into improved contract mining opportunities. A major growth area for contract miners will be provided by the black coal mining industry. Over recent years, firms in the industry have succeeded in winning a range of jobs in both that industry and, to a more limited extent, in brown coal mining.

Key success factors for operators in the industry

• Access to highly skilled workforce. Access to skilled labour. This plays a key role in determining the firm’s performance.
• Successful industrial relations policy. Maintaining harmonious industrial relations. This is crucial for containing costs and meeting targets.
• Economies of scope. The ability to undertake work at a number of sites simultaneously. This provides a buffer against losing a contract at a particular site

Robert Bryant is general manager at IBISWorld.