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Inflation begins to hit Australian mining sector

Inflation begins to hit Australian mining sector

Costs are rising and profit margins are beginning to drop in the Australian mining industry as a perfect storm of prices for labor, fuel and equipment starts to bite.

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By Jackson Lewis 25.08.2018

Costs are rising and profit margins are beginning to drop in the Australian mining industry as a perfect storm of prices for labor, fuel and equipment starts to bite. 

The news comes as the mining sector looks to begin a large expansion phase to fully emerge out of the recession that has clouded the industry.

Balance sheets took a heavy hit in 2013–14 after a decade-long boom, with thousands of staff losing their jobs around the country as the industry struggled to guarantee their laborers work on a consistent basis. Now, however, mining companies are seeming unable to lure their workers back quite so easily. 

Many mining companies are confident that a series of cost-saving measures will elicit more profit, but this new expansive aim is unlikely to see these companies return to the large profit margins that had investor and stakeholder tails wagging just a few years ago.

The mining industry is also struggling to find buyers at quite the same value as they may have been used to, with a deepening trade war between the US and China putting exports to various countries in more doubt than before. Strict protectionist measures from both sides have seen several metals and earth commodities find their values plummeting.

A lack of clarity in the field has therefore affected the level of demand, with confusion over where each side will continue to expect supply. Estimations for future sales are already foggy, with no outlook predicting the end of the trade measures between the two economic superpowers.

Rohan Walsh, who manages portfolios at Karara Capital, said that “the pressures are coming” and the mining industry has to be prepared to accept lower profits while it looks to kickstart the industry again.

Citing the fact that a “number of projects are starting to ramp up again”, Walsh believes that there will be a serious level of competition as large companies fight to get the best deals for supply, equipment and labor.

On that basis, the outlook is mandating a need for expansion to occur “pretty aggressively over the next 18 months,” according to Walsh. It would preclude the need for profit margins to feel negative effects so sharply if they can find their feet and deliver a strong performance before the balance sheets need further examination.

Rivals BHP and Rio Tinto have already confirmed competing plans, as BHP looks to expand its South Flank iron ore operations, and Rio Tinto aims to make hay in Pilbara, working on expanding the site that it has in Koodaideri.

Executives in the mining industry warned of increasing costs at a meeting in Kalgoorlie earlier in the month. They cited a doubling of waiting times for excavation machinery, alongside a rapid surge in prices for the cost of tires for their underground mining machines.

With steel demand rising because of the trade spat between US President Donald Trump and his counterpart China Premier Xi Jinping, getting iron ore out for production is on the minds of a number of companies looking to snap up cheaper rates for machinery and labor. This will inevitably put the big squeeze on profit margins, especially for those who are not winning the race to increase output fast enough.

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