Mining companies and their suppliers under cost pressure

DHL | April 24, 2015 | 10:38 am

by Reg Kenney, President Engineering & Manufacturing, DHL Customer Solutions & Innovation

Economists take multiple variables into account for their economic outlooks, with crude oil being considered as a key indicator among commodities. Next to crude oil however, iron ore is the second most important indicator for the global economy’s shape. It is the most commonly used metal worldwide and is essential for the production of steel and used by virtually every industry including construction, automotive and machinery. The base metal’s price particularly reflects China’s economic health, since the country is the biggest importer worldwide. For companies operating in the engineering and manufacturing (E&M) sector, the price per dry metric ton offers helpful orientation to forecast future demand and own profitability.

In the last twelve months however, the iron ore market underwent a seismic shift with the spot price per dry metric ton dropping from almost $140 to $57.72 or 48.3% year-on-year (as of March 26). This development mainly falls back on two factors: the reorientation of the Chinese economy from quantitative to qualitative growth with reduced construction demand, and supply from major western world producers growing at a faster rate than steel production. With the big-four iron ore producers Vale, Rio Tinto, BHP Billiton and Fortescue bringing on significant new capacity the market has shifted into oversupply.

The situation is not going to change for a number of reasons:

  • Top mining companies with record production levels are prepared for long price war.
  • Even if output is reduced, other producers will step in keep supply levels high and hence, iron ore prices low.
  • Experts do not expect demand to peak in China before 2026.

Given today`s market environment, mining companies and their suppliers from the Engineering & Manufacturing sector are under even heavier cost pressure than before and forced to come up with smarter answers. So, which screws and levers need to be turned to keep business profitable? We see significant potential for cost savings in supply chain optimization – an area, which was not looked at by the industry during the booming years between 2003 and 2014.

The sector can benefit greatly from logistics players, their scale, expertise and global reach. Logistics supports mining companies and their suppliers to stay focused on their core business in turbulent times, while reducing costs, improving quality and increasing efficiency. In order to do that, supply chains will require greater integration and collaboration by setting up control functions, sharing data and segregating the various flows within the supply chain. With their global reach, networks and expertise from numerous other industries, integrated logistics specialists such as DHL can harness the entire portfolio of their capabilities to support all facets of the supply chain, enabling companies to focus on balanced growth, despite the ups and downs of the industry’s key commodity.