September 16, 2021

MINExpo - Resource Demand Soars, Spending Opportunities Follow

By Jarrett Harris
Resource demand is stronger than it has been in years, but massive investments are needed by mine operators to maintain production levels and prepare for future expansion.
  • Fleet electrification benefits include safety, satisfying ESG standards, but high costs, low ROI remain concerns; automation perceived as more compelling with its cost savings
  • Ongoing supply shortages expected to lead to industry consolidation -- as larger players buy smaller ones to expand capacity -- and new competition from vendors with parts availability

Demand Hits Multiyear High
A lot has changed since the last MINExpo was held in 2016. At the time, OTR Global wrote there was “a general sense that the global mining industry has ceased declining.” Now, not only has the industry stopped declining, but industry participants are once again using words like “supercycle” to describe demand levels. “The big players are spending,” said a technology provider interviewed at the show, mirroring findings from OTR Global’s August Mining Equipment report. An equipment producer said, “Miners are coming to us having not spent their full budgets asking, ‘What else can we buy?’ I’ve never heard that before.” A specialty equipment transportation operator said, “At this show alone, we’ve gotten three inquiries for our services -- moving processing machinery and facilities. Sometimes we only get one inquiry a year.” However, as quickly as resource demand is pumping money into company coffers up and down the supply chain, the opportunity to spend is growing rapidly.

Fleet Electrification Offers High Costs, Limited Return on Investment
One of the newest venues seeking miners’ capex is fleet electrification. Caterpillar Inc., Komatsu Ltd., Sandvik AB, Epiroc AB and a host of smaller OEMs showcased battery electric vehicles at the show. The primary application for BEVs is currently in underground mines, as the greatest advantage over diesel is the elimination of fumes. Not only is this a safety issue, but it eliminates the need to adjust an underground ventilation system as a mine progresses.

However, sources acknowledged that fleet electrification is neither cheaper nor more productive than diesel. “There’s not necessarily a cost savings,” one technology provider said. A project consultant with global operations said, “BEV tech is more important from an ESG standpoint than a performance standpoint.”

This presents a significant challenge for OEMs. With “cost per ton” the holy grail of mining metrics, any technology being developed today is expected to have the flexibility to evolve along with the mine it serves in hopes of reducing the long-term hit miners expect to take on the investment. As such, several manufacturers are developing vehicle platforms that will be able to swap out entire power plants as a customers’ needs change. “An electric fleet probably doesn’t make sense for a greenfield project, but it might make sense three years down the road,” one product engineer said. “So we’re working on a way to be able to swap out the power plant from diesel to electric.” Others used phrases like “power plant-agnostic” to describe mining trucks of the future that could share a basic platform but run on whichever power source a customer might need -- diesel, electric or even hydrogen. “It’s not more efficient, but it is more expensive,” one source said.

Automation Helps Drive Cost per Ton Lower
While electrification is viewed as something miners will have to invest in, the return on investment for automation is much more compelling. OEMs are increasingly integrating various fleet-tracking and telematics platforms in an effort to help miners reduce cost per ton. “The goal is to improve efficiency, whether though preventative maintenance or operator behavior,” one source said. Another said, “We’ve calculated a 30% cost savings in maintenance in a fully automated machine.” Several sources said the greatest cost savings associated with automation is not labor, but replacement parts. “Lower tire wear is one of the main cost savings of automation,” one said. Another said, “It’s a lot easier on the machine when you don’t have an operator with a race-car mentality behind the wheel.”

Sources said developing automation solutions is challenging, as each mine is unique. In addition, geography can play a part in miner interest. “It’s similar to Tier-IV emissions -- there are different interests in different regions. Miners in Australia are quick to embrace automation technology. The South American market is not.”

Supply Shortages May Fuel Consolidation, New Competitors
The greatest near-term spending priority for miners -- and headache for OEMs -- is procuring or producing the equipment needed to take advantage of recent commodity price strength. As documented in many OTR Global reports in the past several quarters, supply-chain disruptions are preventing desired expansion levels. Anecdotes regarding missing components and machinery produced with dummy parts until the final parts arrive are no longer the exception, but the rule. And it’s not just a technology issue. One tire producer interviewed said he’s currently quoting only a vague 2H22 delivery window for any order placed currently.

Sources see no end in sight, as the percentage of a machine an OEM has direct control over is limited. “Sixty percent of our products consist of parts that were manufactured by someone else,” one source said. “So much is out of our control.” As a result of the limited supply, transactions are increasingly being determined by availability rather than price. “There is no price negotiation happening currently,” one source said.

A few sources expect consolidation to occur as a result, as larger players buy up smaller suppliers. “I think larger players in the industry will be buying capacity,” one component supplier said. “Acquisitions of smaller aftermarket providers are likely to increase.” In addition, the supply challenges at leading manufacturers may open a door to new competitors. XCMG Construction Machinery Co. Ltd. (000425 CH) had a display at MINExpo for the first time, pitching not an advantage in price, but parts availability.

Additional Quotes
“There’s no end in sight to supply disruptions. Those most aggressive in building inventories have seen them appreciate.”

“The problem with having to build things twice is every time you touch something, you increase chances of a failure. So having to rebuild a machine based on short components raises quality issues as well as margin issues.”

“As a niche equipment provider, we’re having even greater difficulty getting components for one-off specialty builds. It’d be one thing if we were ordering by the hundred -- we’re ordering by the half dozen.”

“Natural gas producers are investing more in carbon capture. They can see that they are next in terms of regulatory pressure.”

“ESG is the filter in assessing how investible a mine is. It’s trumping safety in some cases.”

“Labor issues are problematic for mine performance. The old guard is retiring and there’s a big gap down to the younger generation, as so many left the industry in the prior downturn.”