What will 2023 bring the Australian mining industry? S&P Global’s analysts have provided some insights.
Record high commodity prices, a rush of mergers and acquisitions, a tight labour market and the threat of global recession characterised 2022 for Australia’s mining industry, but what will 2023 bring?
A new report from analysts at S&P Global paints a mixed picture, as they predict worldwide market conditions will continue to deteriorate, thanks in part to inflation, in the early part of the new year, before improving in the latter half of 2023.
“Deteriorating global macroeconomic conditions are expected to persist into early 2023, representing a downside risk to the metals and mining sector as many commodity prices slide and equity market support weakens,” the report states.
“Producers will be impacted by narrowing margins, while the exploration sector will restrain activity amid tighter financing conditions. As the year progresses, we anticipate improving conditions once central banks gain the upper hand on inflation.”
Supply chain issues and commodity prices
The report identifies another interesting trend emerging, which may impact the mining and metals industries. Governments have been moved to tackle the supply chain issues that have affected many globalised industries in the past year, introducing policies that have increasingly focused “on meeting critical material requirements through domestic and regional supplies chains”.
As a result of those policy changes, the report states: “The mining sector should see additional support for the development of projects in the near- to medium-term, buoyed by prices that are expected to remain relatively high through 2026, compared with pre-pandemic levels.”
S&P Global’s analysts expect muted demand in 2023 for many commodities caused, for example, by the downward trends in new construction in the US housing market and in a China struggling under the ongoing zero-COVID policy. Steel and copper consumption is likely to be particularly affected.
“Despite muted demand in 2023, inflation is expected to pressure the metals markets,” the report says. “We forecast 2023 prices to average lower than in 2022 across industrial commodities… with a year-over-year drop ranging from 7% for copper to 33% for lithium.”
Exploration investment’s reversal of fortunes
Exploration investment is greatly affected by metals prices and financing conditions. A surge in metals prices in 2020 saw an increase in financing activity, which continued through 2021 and into 2022. S&P Global’s experts say annual non-ferrous mining exploration budgets are at a 10-year high, but warn that could well be coming to an end.
“As 2023 approaches, global inflation, geopolitical instability and fears of recession are taking their toll,” the report’s authors state. “Metal prices have fallen off their highs and markets have trended downward. This has resulted in investors turning away from the mining sector.”
S&P Global points to financing raised by junior and intermediate explorers totalling US$8.4 billion through to August 2022, down significantly from the US$14.6 billion raised in the same period of 2021. If the trend continues, the analysts forecast a 10%-20% decrease in the global exploration budget for 2023.
“The decrease will not be felt evenly,” the report states. “Gold budgets should decrease relatively significantly, due to a large gold-focused junior sector having difficulty securing funds for its programs.
“Interest in energy transition metals, however, should support budgets for copper, nickel and lithium, although decreases for copper and nickel are expected nevertheless.”
M&A activity likely to slow in 2023
High commodity prices lead to “a flurry of acquisitions” across the mining and metals sector in 2022, but with inflation creeping up and other macroeconomic headwinds, metals prices have corrected from their recent highs. S&P’s analysts believe that trend is likely to continue in 2023.
“Moreover, capital costs and energy prices are expected to rise, leaving miners with potentially lower excess cash reserves to put towards purchasing activity or exploration,” the report states.
“The souring macroeconomic environment and resulting market volatility will likely make for cautious buyers, although these same factors may expand the pool of assets available for purchase in 2023.”
The analysts forecast “strong headwinds” for gold industry mergers, thanks in part to the US Federal Reserve’s hawkish stance of supporting the US dollar against the gold price which “could deter significant purchases, bucking the multi-billion-dollar gold acquisition trend of 2020-22.”