“It just doesn’t get much better for the mining equipment market,” declares Paul Bodar, senior research analyst for Longbow Securities in Cleveland. By all indications, the mining industry will see record demand for at least the next three to five years. That’s good news for makers of giant cranes, shovels, trucks, draglines and other earthmovers—as well as their steel suppliers.

“I don’t see anything on the horizon that will slow things down,” says Lowry Wood, vice president and general manager of heavy equipment manufacturer LeTourneau Technologies Inc., Longview, Texas.

“Commodity prices for everything underground are high, and because of that mining companies are making a lot of money. When they make a lot of money, they buy a lot of new equipment,” adds industry consultant Charles Yengst, president of Yengst Associates, Wilton, Conn.

Kent Henschen, director of corporate communications for equipment maker Bucyrus International Inc., South Milwaukee, Wis., reports robust demand for both underground and surface mining equipment. The underground segment is largely driven by coal demand, while surface mining is about half coal and half copper, iron ore, oil sands, gold, molybdenum, diamonds and various other minerals. 

Mining is strong worldwide, explains consultant Anthony Wilson, director of Canadian operations for West Chester, Pa.-based Metal Strategies Inc. In the 1980s and 1990s, prices for commodities such as coal, base metals and iron ore were relatively low. Rising demand from developing nations including China, India and Russia caused commodity prices to surge in 2002-03, prompting mining companies to dust off plans for new mines and begin active development work. “Now everyone is gung-ho to find new mining projects,” Wilson says.

That enthusiasm for exploration is not confined to just the large mining companies, such as Rio Tinto, BHP Billiton, Xstrata, Vale, Anglo American, Teck Cominco and Rusal. The junior mining companies, which traditionally do much of the initial development work before the majors decide to invest in a new project, are also bullish.

While it takes years for new mines to go from development to production, statistics from Metal Strategies show that mine production has been booming worldwide, in many cases more than doubling. Coal production skyrocketed to an estimated 4.5 billion metric tons in 2007, up from 2.2 billion tons in 2000. Global iron ore production hit 1.65 billion tons last year, up from 859 million tons. World copper production was 15.5 million tons in 2007, compared with 13.2 million tons in 2000.

Yet such natural resources remain in short supply. “Despite the significant advancements made by our customers over the last five years, their increase in mine production has not kept pace with the growth of commodity demand,” says Michael W. Sutherlin, president and chief executive officer of Joy Global Inc., a Milwaukee-based equipment producer. “As a result, all of the commodity markets we serve are currently extremely tight or in supply deficit, and commodity demand continues to grow as the emerging markets industrialize.”

Henschen maintains that the industrialization of China has been occurring at a rate that hasn’t been seen since America’s industrial revolution in the mid-1800s. Sutherlin notes that rapid industrialization is not limited to China. “We are also seeing significant infrastructure build in a wide range of countries, including India, Russia, Indonesia, Turkey, Dubai and Brazil,” he says.

As fast as the mining industry is striving to increase production, it will still lag global demand for years, Sutherlin says. “It will require a very significant step-up in investment to enable mine capacity to catch demand. Thereafter it will require a higher sustainable level of investment to ensure that mine capacity grows on pace with future demand.”

The pressure on supply will be even greater in the near term, he adds, as commodity buyers attempt to rebuild inventories. As a result, it could take three to five years or longer for commodity markets to regain the balance of supply and demand, causing commodity prices to skyrocket beyond historic highs.

Wilson, at Metal Strategies, reports that some commodity prices, particularly base metal prices, have retreated from peak levels, though they remain quite high and should not slow the mining boom. For example, nickel is currently selling at $12 to $13 per pound, down from a high of $16.90 but still well above the $3.10 price in 2002. Likewise, copper is now around $3.50 per pound, down from a peak near $4, but much higher than the 72 cents in 2002.

The outlook for coal is somewhat complex, as both positive and negative factors are affecting demand, Wilson explains. There are two distinct types of coal—metallurgical or coking coal used in steelmaking and thermal coal used to produce energy. Environmental groups continue to apply political pressure to reduce the burning of coal to produce electricity due to concerns about global warming. Nevertheless, demand for coal continues to skyrocket both domestically and globally, Wilson says.

The National Mining Association in Washington, D.C., forecasts that coal production this year will break the record set in 2006, fueled by a 23 percent increase in U.S. coal exports. And foreign markets still can’t get enough. “The global coal market has gone through an unprecedented supply shock within the past year,” says Sutherlin. “Power plants in South Africa and China were shut down because they ran out of coal. China recently had 32 power plants offline because of coal shortages. India’s average stockpile level was drawn down to seven days.”

Worsening the problem, several traditional coal exporting countries, including Russia, Indonesia and Thailand, are increasing their domestic consumption of coal and are curtailing exports. In addition, the increase in coal consumption is not limited to emerging markets. Coal-fueled power generation capacity is still being added in both Europe and the United States. These factors should cause a deficit in the coal market this year of 60 million to 100 million tons, Sutherlin estimates.

“This supply shortage, coupled with high prices, is driving the acceleration of international expansion projects, primarily in Australia, South Africa, Russia and the United Kingdom,” Sutherlin says. Given that the international markets are setting coal prices in the United States, this is driving a new round of domestic mine expansions as well, he adds.

With global steelmaking production growing at a compound annual rate of 7 percent for the last five years, both metallurgical coal and iron ore supplies are coming under great pressure. Iron ore prices have risen fourfold in the past four years. “Three customers buy almost 70 percent of the seaborne-traded iron ore,” Sutherlin notes. “Despite announced expansion projects that would increase their individual capacities 30 to 70 percent by 2012, iron ore is expected to stay in deficit. In fact, some analysts are projecting steel supply to fall 20 million to 30 million tons less than demand this year due to shortages of raw materials.”

In spite of declining demand for copper in the United States, the buildout of the electricity grid in emerging markets, especially China, should keep the global copper market very tight, Sutherlin says. “The major announced expansion projects will add just over 4 million metric tons of copper supply by 2011, if they are completed on schedule and reach their full production targets. However, demand should grow by a similar amount, keeping inventories tight. And if U.S. demand returns as expected in 2009, the copper market could be pushed into a significant supply deficit.”

Domestic manufacturers of mining equipment have definitely benefited from these tight commodity market conditions, as mine operators use their revenue windfall to upgrade equipment. James Meil, chief economist for Eaton Corp., Cleveland, observes that most mining equipment is made either in the United States or Japan, especially surface mining equipment. American manufacturers currently have a competitive edge due to the weak U.S. dollar. Even without the exchange rate advantage, foreign buyers typically account for the majority of mining equipment sales, generally 65 to 70 percent, Henschen says.

Despite recent moves to expand their production capacity, major mining equipment producers are full up. “Lead times for shovels are extended,” Henschen says. “All of our shovel manufacturing slots are filled for this year. While there are still slots open for next year, some have already been sold for 2009 and 2010 with customers spacing out their orders based on their requirements.”

Not all of the extended lead-time is due to demand for machinery. Some results from the tight availability of parts, particularly bearings, tires and gear blanks. “We seem to get enough to get by, but we would like to have more breathing room,” Sutherlin says. “We always seem to be up against some supply issue, especially for items where there aren’t a lot of alternative suppliers. It is a challenge, but so far it has been manageable.”

LeTourneau is working through the same supply bottlenecks, says Wood, “but I don’t think we have lost any business because of an inability to supply customers.”

Machinery makers report that steel availability has not been an issue, even though mining equipment contains a lot of high-strength, heat-treated alloy plate. Chris Plummer, managing director of Metal Strategies, notes that alloy plate is in tight supply due in part to unusually heavy consumption by the oil and gas industry. The larger problem for mining equipment companies, he says, is the steel’s price, which has doubled in the past nine months from levels that were already double the trend average.

Due to the high prices for steelmaking raw materials, including metallurgical coal and iron ore, the steel price increase was not altogether unexpected. Joy Global was able to push its equipment prices ahead of its material cost increases, though steel prices came in even higher than anticipated, Sutherlin says. “There is risk with steel costs going forward, but at this point we are managing it through our backlog and with pricing formulas.”

“Our customers understand the market and that our biggest cost is raw material, primarily steel,” adds Henschen. “Both steel prices, as well as the price of the materials used to make that steel, are going up.”

Surging steel prices are certainly easier to deal with in a market where so many customers desperately need mining equipment. Mining equipment manufacturers have pricing power, says Meil. “They have no problem increasing prices when they have customers beating down the door for equipment.”