Mining Equipment’s a Hot Commodity
By Myra Pinkham, Contributing Editor
Makers of the giant trucks, shovels and other earthmoving equipment used by the mining industry are having trouble keeping up with the demand—which is good news for their steel suppliers.
Strong global demand for minerals and other commodities promises to fuel demand for mining equipment for years to come. This is positive news for domestic steel suppliers, not just because of the large amount of metal used to make each giant mining truck or shovel, but because much of this equipment continues to be produced in the United States.
“Anything that has anything to do with commodities is doing well,” says Jim Hoffman, senior vice president of operations for Reliance Steel and Aluminum Co., Los Angeles.
“We have seen a robust rebound ever since the end of the recession,” says Mark Sanders, vice president of corporate marketing for Joy Global Inc., a major equipment maker based in Milwaukee. In fact, he describes the slowing of the mining equipment market during the economic slump of 2009 and early 2010 as merely “a breather,” adding, “now that the global financial crisis is behind us, the long-term growth cycle has continued.”
“It appears that with commodity prices where they are, and mining demand up throughout the world—especially in emerging markets like China, India and South America—the market for mining equipment will continue to be fairly strong for some time,” says Bill Jones, chairman of O’Neal Industries Inc., Birmingham, Ala. Jones and other steel suppliers note that production of the huge earthmoving machines consumes a lot of plate, as well as shapes, tubing, beams, and carbon and alloy bars.
Charles Yengst, president of Yengst Associates, Wilton, Conn., says prices for such minerals as copper, iron ore, gold and coal are up 15 to 20 percent. American Metal Market reports that Comex gold prices are currently at a record $1,540 per troy ounce. Copper is also very high at $4.10 a pound. While the current Comex spot copper price has slipped 8.6 percent from its $4.50 peak in February, it is still up about 40 percent from a year ago and 180 percent from levels during the depth of the recession, AMM reports.
Prices for iron ore and coal, especially metallurgical coal, also have risen significantly. According to Kimberly Leppold, senior steel analyst for Metal Bulletin Research, iron ore averaged $187 a metric ton in May, up from $173 a ton a year earlier and $63 a ton early in 2009. Metallurgical coal averaged $300 a metric ton in May, up from $238 a ton a year earlier and $132 a ton in mid-2009. While thermal or steam coal used in power plants has not quite returned to pre-recession highs, metallurgical coal and iron ore prices have, adds Luke Popovich, spokesman for the National Mining Association.
These higher commodity prices have prompted many customers to invest in large mining equipment, says Mike DeWalt, manager of investor relations for Caterpillar Inc., Peoria, Ill. “Economic growth in developing countries has been strong. That is driving investment, infrastructure and increased demand for commodities, which continues to be good for our business.”
While some commodity prices have moderated in recent weeks, they are still high enough to warrant further investment in mining activity and equipment, says Eli Lustgarten, senior vice president of Longbow Securities, Cleveland. Globally, mining equipment is sold out for the year, he reports, with capital investments by mining companies forecast to grow 30 percent both this year and next.
Currently, all of the major equipment manufacturers are operating close to full capacity and have growing backlogs that extend out into 2012. “Right now, mining companies are profitable. As long as they continue to have capital to spend, they will buy new equipment,” Yengst says. “This is a replacement type of business. Mining trucks and shovels, much like major appliances, wear out and need to be replaced periodically. I think we will continue to see healthy backlogs into 2013.”
Eventually, commodity prices will again drop below the marginal cost for the development of new mining properties, says Charles Bradford, metals analyst and principal of Bradford Research, New York. “But that will not happen until the next recession, and not just this slight slowdown we have been experiencing recently.”
“Mining is a long cycle business. It takes five to 10 years to develop mines, so mining companies tend to take a very long view of the global economy,” says Sanders at Joy Global. “They aren’t concerned about quarterly fluctuations.”
All eyes are on China and India to determine how long these good times will last. “China accounts for 40 percent or more of all commodity consumption. As China goes, so goes the mining industry,” notes Popovich at NMA.
“We are very bullish about the long-term horizon,” Sanders says. “We are not seeing anything that will derail this growth. There are so many people in China and India, and they all desire to lead better lives. That is driving massive demand for raw materials.”
Even with the Chinese government making moves to cool down its economy, Chinese iron ore imports are up about 9 percent year on year, while copper imports are up 7 percent. Chinese copper consumption has increased about 20 percent in the past year, Sanders notes.
In its May quarterly report, Morgan Stanley forecast that global mining activity will increase 38 percent this year and 47 percent in 2012. Citigroup estimates 2011 global mining capital expenditures at $92 billion, a 38 percent increase.
Despite this uptrend, some companies have been unable to develop mines as quickly as they would like due to government regulations and permitting. For example, Bradford notes, Steel Dynamics Inc.’s Mesabi Nugget iron nugget manufacturing project in Minnesota has come on line, but the company has not yet been granted the appropriate permits to begin mining iron ore in the area. “There is a fair amount of mining equipment that has not been ordered yet because of such delays in developing or redeveloping mines,” Bradford notes.
Among the regulatory issues in the United States are new safety rules related to water usage, especially at surface mines, which are expected to make it even less economical in regions where mining costs are already high, Popovich says.
Despite such demand dampeners, global mining companies are operating at about 90 percent of their capacity and looking to expand their operations. To do so requires the purchase of more mining equipment from heavy equipment manufacturers that are already struggling to fill orders.
To address its production constraints, Caterpillar is investing in capacity increases at plants around the world, including substantial investment in the United States. “In fact, more than half of the $3 billion that we expect to spend on capital expenditures in 2011 is being invested in the U.S.,” DeWalt says.
Projects at Caterpillar include a capacity expansion for mining trucks in Decatur, Ill.; a new excavator facility in Texas; a new factory to manufacture locomotives in Muncie, Ind.; a capacity expansion for mining trucks in India; a new logistics center, engine plant and excavator capacity in China; and a new factory for small wheel loaders and backhaul loaders in Brazil.
Other equipment makers also have announced plans to increase production, especially loading and haulage equipment. Joy Global has expanded output at U.S. production facilities through its Operational Excellence production optimization program, which has helped the company keep its lead times fairly consistent at just under 12 months, Sanders says. It is also building new factories in China and India.
Richard Smith, director of product marketing for Komatsu America Corp.’s mining division in Peoria, Ill., says that while his company periodically has shifted production from one facility to another to effectively manage production capacity, it does not plan to build new factories due to the current increase in demand. “We are working very closely with our customers to determine their immediate and future needs,” he says, “to make sure we understand what products they need and when they need them.”
In general, equipment makers are being careful about adding too much new capacity, given the cyclical nature of the mining business, Yengst says. “They all realize there will be a time when customers either won’t need any more equipment or they won’t have the money to buy it.”
One quick way for a company to expand its product offerings is to acquire a competitor. Longbow’s Lustgarten reports that merger and acquisition activity in the mining equipment sector has picked up in the last year or two. In February 2010, Milwaukee-based Bucyrus International Inc. acquired the mining equipment unit of Terex Corp., Westport, Conn. Nine months later, in November, Caterpillar announced its intention to acquire Bucyrus in an $8.6 billion deal that has already passed muster with regulators and is expected to close later this year.
In mid-May, Joy Global announced its intention to acquire Houston-based LeTourneau Technologies Inc. for $1.1 billion. LeTourneau builds equipment for the mining and oil and natural gas drilling industries, as well as producing earthmoving equipment and steel plate.
Yengst called the acquisition of Bucyrus a perfect fit for Caterpillar, as Bucyrus’ business is heavily tilted toward mining shovels, and Caterpillar needs shovels to fill a hole in its product line. In fact, prior to announcing this acquisition, Caterpillar entertained a project to design its own shovels, “but they decided to acquire Bucyrus instead,” he says.
Likewise, Sanders says, LeTourneau fits Joy Global like a glove, giving the company a wider range of wheel loaders, as well as more exposure to the oil and gas industry.
“The general consensus is that commodities pricing will remain strong and, as a result, demand for mining equipment should also remain strong,” says steelmaker John Ferriola, president and chief operating officer of Nucor Corp., Charlotte, N.C. Indeed, with other markets still lagging, the steel industry’s appreciation for mining runs deep. n