World's Appetite for Minerals Feeds Colossal Mining Industry - MINExpo 2009
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World's Appetite for Minerals Feeds Colossal Mining Industry

By Kim Phelan

Article Date: 11-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.

Some sectors of the CE industry could catch nice crumbs from mining's bountiful table.

Evidence of the abundant vitality of the mining equipment industry was more visible than even the monstrous haul trucks and mine shovels on display at the 2009 MINExpo Sept. 22-24, hosted by the National Mining Association. More than 41,000 registered attendees roamed 600,000 square feet of enormous halls plus an outdoor exhibit area of the Las Vegas Convention Center, visiting about 1,300 manufacturers and service providers that supply this supercharged, super-active market.
“This is a really unprecedented time right now in the mining market,” said Mark Koznarek, partner and senior research analyst at Cleveland Research Co. “The capital spending is extremely high.” The world’s voracious appetite for commodities such as coal and copper (and a host of others) are creating record equipment backlogs and positive mine forecasting for several years out, according to Koznarek, who attended several major OEM investor meetings during the convention. He says Bucyrus executives estimated the world coal consumption, for example, climbing to 5.8 billion tons by 2015, compared to 4.1 billion tons of consumption in 2005, with the biggest demand increases coming from China, which will account for more than half of the total global increase – 1.6 to 2.7 billion tons within the ’05 to ’15 time period.Demand for copper, too, is explosive, according Mike Quirk, vice president of Wagner Equipment, the Cat dealer for Colorado, New Mexico and Utah. He explains mine company business plans are currently figuring on five to seven years of strong demand based on price increases that have jumped from about 80 cents per pound to as high as $4, but closer to $3.05 at the time of the convention. The unique, predictive ability of the mine industry to accurately anticipate mineral commodity pricing so far into the future allows mining companies to plot out their long-term investments in mine site development, workforce recruitment and extreme-duty mining equipment. “The takeaway from this show was that mining couldn’t be much stronger,” said Quirk. “And if you’re a dealer in this market, it means that you’re going to be busy, and you better build a product support network and you better communicate to your manufacturing partners that we’ve got to gear up for production – this market is not going to go away.”Additionally, according to Quirk, lead times on some mining machinery – such as haul trucks and loading tools, for example – extend out as long as three years.The demand – which actually exceeds OEM production capacity –  translates into phenomenal dollar values in equipment revenues among the leading manufacturers of mining equipment:
  • Caterpillar, by Koznarek’s estimations, earned $5 billion in mining equipment revenues in 2007, which primarily comprised truck sales and some high-end loaders.
  • Joy Global, the No. 2 or 3 player in mining machinery and the world leader in underground coal mining equipment, according to Koznarek, reaped 1.5 billion in bookings for the quarter ending this July, which was 139 percent higher over the same period a year ago. Joy earned $2.5 billion in revenues last year and expects to end 2008 with $3.3 billion in revenues; the company’s backlog of $3 billion represents two full years of future original equipment visibility.
  • Komatsu, Koznarek reports, estimates its shipments to mining will be $4 billion this year, up from $3.1 billion in ’07. The Japanese company expects mineral commodities prices to stay well above production costs through at least 2010, and its mining equipment backlog is up 116 percent, according to Komatsu financial handouts at their investor meeting.
  • Bucyrus, another major manufacturer of massive mine shovels, draglines and other mining equipment, told investors and analysts the company will finish 2008 at about $2.5 billion in revenues.
These figures, of course, only represent a few of the largest corporations making some of the largest equipment and selling it to the largest and most sophisticated mining companies of the world. Quantifying the actual total size of the mining industry globally is a practically impossible tabulation task, complicated by the many other large-equipment players, including Terex, Liebherr, Hitachi, to name a few, thousands of small machine and component suppliers, as well as emerging Chinese equipment manufacturers. In addition, much heavy construction equipment is often repurposed into mining applications in developing countries, says Koznarek.
And new equipment sales do not fully capture the whole mining picture – a large portion of this multibillion-dollar market comprises product support. In the case of Joy Global, said Koznarek, only 40 percent of its $3.3 billion revenue purse is from new equipment; the rest is aftermarket.
“With mining, as you can imagine, in the extraordinarily aggressive conditions in which these machines work – and operating literally 24/7 – you just chew this equipment up,” said Koznarek. “So there’s a ferocious stream of aftermarket parts and service that these things generate. That’s why it’s such a great business for the manufacturers – it’s very profitable.”
Bringing it Home for CE Dealers
It’s all well and good to cheer from the sidelines as another equipment market shatters its own performance records, but with the exception of dealers who represent both construction and mining lines – like portions of the Cat and Komatsu dealer networks, for instance – is there anything good that the CE industry might experience as a byproduct of mining’s strength?
Perhaps. And, depending on a dealer’s geographic proximity to mine activity, at least one trickle-down benefit from the good health of mining is reclamation.Before U.S. mining companies can forge ahead with permits for their mine site, says Quirk, they must have thorough reclamation plans in place that detail the company’s regimen for either returning the mine site to its original condition prior to mineral extraction or improving the site to even better than before mining had begun. And because mining is thriving at the pace it is, thanks largely to the lofty levels of commodity pricing today, Quirk explained, mining companies are doing as much reclamation now as they are actual mining.“There is as much a sense of urgency to get reclamation done in this environment as there is to get product out of the ground,” Quirk said. “And there is so darned much pressure to get product out of the ground that these efforts are completely independent. The producing side of the mining company and the reclamation side are often completely unrelated. Or, many times, reclamation is done by heavy construction companies using more traditional heavy construction equipment. These might be construction contractors who build damns and other large infrastructure projects – they will frequently go in and do the reclamation work.”That could add up to both equipment sales and product support business for AED dealers with operations in mining states. But apart from capturing this type of supporting-role work that complements mining, CE dealers would find quick entrance into the mine industry – purely for sake of compensating for weak construction markets – extremely difficult. “It’s not a flavor of the week venture,” said Quirk. “The demands on suppliers remain extreme in this industry.” Indeed, the relationship mining companies have with their dealer partners is one steeped in trust, excellent service and long-term commitment – and what it boils down to is that it’s often just too much of a headache to keep shopping price and value; rather, mine fleet executives prefer to identify preferred and proven suppliers and then stick with them over the long haul, according to Quirk. Because of the quality, efficiency, safety and uptime requirements mines demand from their dealer partners, mining is not a market into which dealers can easily move, open up an operation and expect to gain market share as they might with, say, aerial, crane or even earthmoving equipment. “Price is always important no matter who you are,” Quirk added, “but these folks have no appetite for building relationships with half a dozen people. They are going to expect people to perform, and the people who perform at the highest level are the ones with whom they make long-term agreements and develop a relationship. It’s a long-term process and the demands are very high. If you’re a supplier and you don’t want to operate at the highest level, don’t waste your time.”Big Commitment
That high-level standard applies to manufacturers, too, who must invest deeply before they realize the big profits. A noteworthy example from MINExpo, says Koznarek, is respected rock mining and drilling equipment manufacturer Sandvik, which introduced itself as a new and formidable contender in the coal mining segment, joining Bucyrus and Joy in the high-productivity, high-uptime and high-cost underground mining equipment market. Because of the tremendous aftermarket commitment required by any OEM in this segment, entry is a serious undertaking.
“You have to have significant inventories of spare parts – time is tens of thousands of dollars a minute in some of these mines,” said Koznarek. “It’s a big commitment to come into a new market; you can’t just do it piece-meal. You have to really go in big; otherwise you get egg on your face and you ruin your reputation. [Sandvik’s announcement] is notable because they must be absorbing some significant expenditures to jump into that market.”The commitment of mine equipment manufacturers is also manifested in accommodating customers’ individual and exacting requirements for safety.Take, for example, the EKATI diamond mine operated by BHP Billiton 200 kilometers south of the Arctic Circle. R&D superintendent Jim Huisman says that his company partners with a few large equipment OEMs – in the past, delivered new equipment often spent several days in the mine’s own service shop for safety customization such as replacing ladders with stairs and fitting equipment with proper fire suppression; however, he says, their manufacturers will now take those safety protocols and modify BHP Billiton’s equipment at the factory so it’s ready to go into service immediately upon arrival to the mine site.The demand on dealers is equally if not more severe at the frigidly cold and remote diamond mine located in Canada’s Northwest Territories, where employees must be flown in and out for their two-week work shifts.Huisman points out that their geographic location creates a unique challenge for their suppliers, as well as the company’s own logistics personnel. Mining equipment, as well as so much of its accompanying spare parts and tires, is too large to be flown in, and must therefore be transported to the EKATI site on the ice road within a six-week period between February and March. “Our suppliers work quite closely with us on keeping the right amount of spares onsite in our warehouse – we have probably a larger inventory of spare parts than most places would have because of the difficulty in getting things to site,” said Huisman. “Our suppliers help us in determining how many spares we need to bring up on the ice road and how much maintenance is going to be involved for the coming year so we have all the required items on hand when we need them.”Finning, the Caterpillar dealer for Canada, has an onsite product support presence at the mine site – an example, says Huisman, of the strong partnership his company enjoys with one of its primary dealer suppliers.Identifying anticipated need and then procuring a full year’s worth of equipment, parts, tires and fuel adds intensity to what Huisman already calls one of the company’s biggest challenges: rising costs. Because they are restricted by the tight timeframe in which necessary products must be brought in, the company cannot play the market and watch for favorable pricing on fuel, for example. They’ve got to have it when they’ve got to have it, period.Little wonder, in view of these cost pressures, that the company allocates a staff position – Huisman’s – dedicated solely to seeking, researching, testing and recommending new technologies and products to help the mine site continually improve every possible efficiency.Mining’s Biggest Challenges
Mining companies feel other problems in addition to the rising costs of fuel, equipment and other resources. Those same lengthy equipment backlogs that give OEMs such confidence and security just give customers a pain in the backside. In fact, says Quirk, agreements on availability targets (as well as dealer maintenance practices) are areas of constant scrutiny among global customers. And the industry’s tire shortage merely exacerbates the delay syndrome.
Globally, mining firms face many conundrums when they seek to develop a new mine site. Unstable governments, unstable currencies and cultural idiosyncrasies all create obstacles in hostile or underdeveloped nations, making the process dicey at best. But the absolute necessity for strong product support in this business screams for a skilled workforce that must sometimes be formed from scratch. Because mine sites also tend to be in remote locations, it is not unusual, either, for a mine company to literally build an entire community before a single mineral is mined in order to attract skilled workers.Creativity never hurts. Quirk cites an example in Indonesia in which a mine company conformed to the local culture’s zeal for surfing by creating beach houses for employees, thus supporting a lifestyle of 10-hours-a-day surfing, 10-hours-a-day working and four hours of sleeping! Image Management
A challenge that the mining industry is addressing seriously and hence with admirable success is its public image, especially on the safety front. In fact, a very clear message resonated throughout MINExpo’s exhibit and education spaces alike: Mining companies and their partnering suppliers earnestly believe in and are working to achieve the “perfect zero” in terms of mining-related injuries.
“Basically, this industry is willing to spend more capital to become safer, contrary to what the common impression might be,” said Koznarek. “If you interviewed people on the street they may say mining is an industry that puts people at risk, spoils the environment, pulls resources out of the ground to line their own pockets – but the reality is quite different.”Manufacturing’s development of high levels of automation and system-inherent redundancies, says Koznarek, are evidence of commitment to keep humans safer. “They are designing safety right into the equipment so it’s almost impossible to operate some of this machinery in an unsafe manner,” he added.
Autonomous technology, with obvious productivity implications, is also a concept that could enable some dangerous mining tasks to be performed without operators – and according to Koznarek the advances have been considerable over the past four years since the last MINExpo.
“Komatsu has a customer, who is basically their beta test site, and is operating a mine on an autonomous basis,” said Koznarek. “And Caterpillar also made a big announcement of development that they have underway that’s just about ready for prime time themselves. One of the key drivers [for this technology] is to get personnel out of the mines and make these things more safety compliant.”
Mining’s overall image, though perhaps not flawless (at least in the minds of environmental purists), is changing for the better.
“Over the 20 years I’ve been in this business, the real reputation – not the demonized reputation – and the behaviors of these companies have become considerably more responsible,” said Koznarek. “Their expenditures on safety and the environment are significantly higher than they’ve been in the past – they’re really trying to be good citizens; the safety records of the high quality mine operators are really impeccable. They stand up to best-in-class standards, more so than the construction trade, for instance.” He estimates that construction site fatalities could tally 25 to 50 fold more than those occurring in the mines.Public sentiment about mining is also shifting now that consumer bank accounts are affected, according to Quirk. “Look at what’s happened in the last couple of months,” he said. “There is a fresh and almost desperate awareness of the price of oil and gas, and we’ll go into another winter heating season where prices are rising; it puts pressure on everybody. Historically, any kind of mining or mineral extraction was considered taboo and ugly, bad news and environmentally unfriendly – but now when it hits people in the pocketbooks, they’re a little more interested in it.”
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