BMI View: In a global low-price environment for commodities the US has been losing ground, albeit marginally, to emerging markets as the country's relatively high start-up and operating costs lead miners to prioritise profitability over expansion. As such, we are expecting output growth to be moderate across much of the US mining landscape over the next few years, while a contraction is expected in the production of mined commodities. Nevertheless, the US will remain a major long-term draw for mining investment, which is testament to the country's considerable mineral resources and exemplary regulatory environment.
While clearly among the largest in the world, the US mining sector will expand slowly in value terms over the next few years as both major and junior mining firms defer and scale back major investments amid a weak price environment for most major mined commodities. For the period of 2015-2019, we forecast the industry's value to expand by 1.9% a year on average, to reach USD138.8bn. Though substantial in absolute terms, the size of the mining sector will actually shrink relative to the size of the wider US economy as the growth of the industry falls below expansion in GDP. We forecast the mining sector to equate to 0.65% of overall GDP in 2019, compared with an estimated 0.73% in 2014.
|Slow Growth Reflects Developed Market Trends|
|US - Mining Industry Value & Growth|
|e/f=BMI estimate/forecast. Source: BEA, BMI Calculation|
Prices Levels To Hold Back Growth
Falling commodity prices will remain the main challenge to US mining firms over the remainder of 2015 and through the next few quarters. Gold miners have come under particular pressure in recent months, as the average price of the metal on the international market has slumped to USD1,075/oz amid an expensive dollar and weak demand from European and other major consuming markets. Falling profit margins have been a major worry for North American mining groups whose operating costs are among the highest in the world. For example, Kinross Gold Corp has reportedly projected all-in sustaining costs of between USD1,000 and USD1,100/oz for 2015, while for Iamgold they are set at between USD1,075 and USD1,175/oz.
Falling margins will deter companies from making major new investments in the short term, while a number of existing projects stand to be deferred until prices start to recover. Meanwhile, we expect a push towards consolidation as many junior mining firms suspend or cease operations. Nowhere is this more apparent than in the coal mining sub-sector which has witnessed a series of asset sales and downsizing over recent quarters, leaving industry leaders Peabody Energy, Arch Coal, Alpha Natural Resources and Cloud Peak Energy to share more than half of the country's total production. Elsewhere, recent months have seen a number of global mining groups scale back or sell-off their US operations, with the South African gold miner AngloGold Ashanti perhaps the most high-profile company to exit the market over the past few months.
Exporters Losing Out To Global Competitors
The mining industry as a whole will face increasing competition from its international rivals over the coming years. Like their foreign counterparts, US miners have profited from a global boom in mineral and metals demand over the past decade as consumption levels have grown in China and other Asian markets. However, collapse in Chinese demand coupled with increased local production levels have stymied import volumes over recent quarters. Total US coal exports fell by 17% in 2014, a contraction exacerbated by the shift by many major consumers towards cleaner sources of energy production. Going forwards, US exporters can expect to face the added challenge of a strong US dollar, which will see importers look increasingly to lower cost producers such as Indonesia and Chile. The situation will be of acute concern to US copper miners, for whom China represents the single largest market in terms of exports, accounting for more than half of total shipments in recent years.
Domestic Market To Provide Some Comfort
A robust domestic environment will provide some relief for US miners over the next few years as strong levels of domestic output support growth in mineral and metals consumption. We forecast US GDP to expand by 2.5% in 2015 with growth accelerating to 2.6% next year. The main exception to this dynamic, however, will be the US coal mining sector which continues to bear the brunt of EPA legislation and the country's efforts to meet global carbon emissions targets. Indeed, the share of thermal coal in the US energy mix has fallen from contributing 44% of total power generation to just 30% as of mid-2015.
Despite various headwinds, we wholly expect that the US will remain a prominent long-term destination for global mining investment. We highlight the country's vast natural resources, well-developed mining industry and infrastructure, and stable political environment, all of which will remain a draw for overseas miners. Furthermore, the country's mature capital markets allow junior firms to find financing opportunities, even if credit remains more constrained following the global financial crisis.