Global Industry Overview - Key Themes For Mining In 2018 - JAN 2018

BMI View: As improving mineral prices prompt a cautious return to growth strategies for major miners, spending will focus on applying advanced technology to operations and mining minerals in demand from the high-tech sector , such as copper, lithium and cobalt. Nonetheless, regulatory uncertainty, particularly in China, will create risks to this otherwise positive outlook.

Theme Description Metrics Winners Losers
Source: BMI
Limited Gains In 2018, But Uptrend Intact For Metal Prices The metal price rally will lose steam over H118 due to a weakening in Chinese demand growth. Nonetheless, improving fundamentals will keep a floor under prices, ensuring that metals remain within the higher trading range broken into in mid-2017. Track metal price performance; S&P GSCI industrial metal index; LME 3-month forward metal contracts Producers Industries using metals as input (e.g. construction, autos)
Mining Investment In Advanced Technology To Accelerate As mineral prices improve yet miners remain committed to strengthening balance sheets, investment in advanced technology, such as blockchain, drones and automation, will prove a key strategy to achieving operational efficiency. Global mining capex % change; value of deals with technology firms Tech-focused suppliers (e.g. Siemens, Cisco etc) Bulk-focused suppliers (e.g. Fenner)
Low Carbon Metals To Be Investment Hot Spot Elevated copper, lithium and cobalt prices will prompt significant investment into these mining sectors in 2018 as producers race to meet demand and lock in higher pricing. Copper, cobalt, lithium project capex for 2018; top producers' stock performance, profitability Miners with strong copper and/or cobalt asset portfolios; chemical firms experienced in lithium production Iron ore, coal miners
Key Challenges: Environmental & Nationalist-Driven Risks Come To The Fore A global trend toward tightening environmental regulations and governments looking to secure more revenue from the recovering mining industry will create uncertainty in key countries. Mining FDI inflows; mining employment rates Stable mining environments, such as Australia, Peru and Canada Producers operating in high-risk countries; local communities' and governments' revenue in case of divestment
China To Generate Significant Volatility In Metals Markets A lack of clarity surrounding reforms to China's commodities production base will drive volatility for commodity prices in 2018. GDP, y-o-y mining output growth; metal prices; ore/metal imports Mineral-exporting countries; global metal prices Most polluting producers; mining labour

1. Limited Gains In 2018, But Uptrend Intact For Metal Prices

Industrial metals will remain on an upward trajectory over 2018, although we highlight near-term weakness as prices consolidate over the coming months. For instance, after year-to-date gains of approximately 25% for copper prices, as of December 7, we forecast prices to average only 5.0% higher in 2018 (USD6,300/tonne) compared to 2017 (USD6,000/tonne). Fundamentals will continue to tighten, keeping metal prices supported, while premature optimism over the demand boost from electric vehicles will wind down in the near-term. A government-led rebound in China's construction industry growth since early 2016 has underpinned the rebound in industrial metal prices over the subsequent period. In contrast, we expect 2018 to see weaker public infrastructure spending growth and more stringent efforts to curb real estate speculation ( see ' Rising Interest Rates To Weigh On Property', November 24 2017). Ferrous metal (iron ore and steel) and nickel prices will be most exposed to this slowdown, and we expect them to underperform base metals generally.

China poses key upside risks to our relatively muted outlook for metal prices in 2018, on both the supply in demand side. With regards to the former, stricter enforcement of metal capacity cuts than we anticipate, particularly for steel and aluminium, from Chinese authorities on environmental grounds would create a supply crunch and add upward pressure to prices. On the demand side, the extent to which China enforces an import ban on scrap metal could ramp up consumption of refined metal and tighten global markets ( see 'Quick View: Copper Price Breakout Confirms Upside Risks', July 27 2017).

Gradual Gains Ahead Following A Strong 2017
Select Metals Price Forecast Growth (% y-o-y)
e/f = BMI estimate/forecast. Source: Bloomberg, National Sources, BMI

2. Mining Investment In Advanced Technology To Accelerate

As rising mineral prices continue to improve miners' financial positions following years of downturn since 2013, spending will increasingly target technology as a means to more efficient production to better withstand future price volatility, and improving safety and environmental records in an era of tightening standards. Partnerships between major miners and technology firms will provide new opportunities for the latter to enter into a valuable new industry. Companies operating in developed countries with significant mining industries, skilled labour and high levels of connectivity, such as the US, Canada and Australia, will lead the trend. Building on the ongoing wave of sensors, automation, drones and connected machinery, we highlight artificial intelligence, blockchain platforms and cyber security as the next key technologies to reshape the mining industry ( see 'Technology And Mining: A Primer On Four Notable Trends ' , November 9 2017).

Technology To Unlock Further Profitability
Bloomberg Global Diversified Miners - Average Profit Margin (%)
YTD = as of December 8 2017. Source: Bloomberg

3. Commodities Of The Future To Be Investment Hot Spots

Metals linked to low carbon systems, in particular those used in battery production, will be investment outperformers over the coming quarters as rising demand keeps prices elevated. Namely, we expect to see solid project development in global copper, lithium and cobalt sectors. Over the second half of 2017, several major miners committed significant spending to copper projects in 2018, including BHP Billiton's approval for a USD2.5bn expansion at the Spence copper mine in Chile and allocation of more than AUD600mn to the Olympic Dam copper mine in Australia. Peru will also remain a copper investment hot spot, with the government set to tender the USD2.0bn Michiquillay project by the end of 2017 and Southern Copper advancing the USD1.4bn Tia Maria project.

Shift To Copper Reflects Carbon-Consciousness
Copper & Coal - Global Mines By Phase
Source: BMI Mines Database

In the lithium sector, the race to bring new production online will intensify as Chinese firms look to gain market share in the tightly controlled sector. We forecast double digit growth rates in key lithium producing countries including Chile, Argentina and Australia, in 2018 as projects ramp up. In the firm's Q317 report, Chilean lithium producer Sociedad Quimica y Minera de Chile (SQM) identifies nine projects starting up or under construction across Australia, Chile, Canada, Argentina and Brazil. Finally, cobalt, typically mined as a by-product of copper or nickel, will gain investor attention as prices remain elevated due to undersupply. While Glencore will remain a top cobalt miner, producing 12.7kt in H117, pure-play junior firms will also progress projects. In December 2017, Canadian junior miner First Cobalt raised USD25mn through private placement financing and will continue to develop the Greater Cobalt project in Ontario, Canada.

Spending To Take Off For Lithium Producers
Select Lithium Producers - Capital Expenditures (USDmn)
Est = Bloomberg estimate. Source: Bloomberg

4. Environmental And Nationalist-Driven Risks To Come To The Fore

Globally, increasingly stringent environmental regulations will pose key downside risks to our production growth outlooks in major mining markets. Additionally, rising mineral prices will prompt some governments to adopt a more nationalist stance by claiming a larger share of mineral resource wealth, potentially affecting mining investment decisions. Below, we highlight the countries which we believe may be most affected in this regard over the course of 2018:

Select Countries - Key Environmental And Nationalist-Driven Risks For Miners In 2017
Source: BMI
Country Environmental/Nationalist Risk Impact Relevant Analysis
Brazil Mining Reforms Raising mining royalties, particularly on iron ore, without a comprehensive overhaul of the mining code will undermine government efforts to improve investor sentiment in the industry. ' Quick View: Raising Royalties Without A New Mining Code To Pose Downside Risks In Brazil', November 30 3017
Colombia Court Rulings At Odds With Federal Policy Key gold mining projects in Colombia will remain in legal limbo as the government looks to reconcile recent Constitutional Court rulings against the sector with federal regulations. ' Judicial Uncertainty Darkening Gold Outlook ' , May 24 2017
Philippines Future Of The Ban On Open Pit Mining Ongoing uncertainty on whether the ban on open pit mining will remain in place will continue to feed policy uncertainty and nickel price volatility. 'Asia Mining: The Five Key Themes', September 22 2017
South Africa Uncertainty Surrounding The New Mining Charter The country's mining sector will remain plagued by policy uncertainty in the coming months as the implementation of the new mining charter is delayed. The new charter - which includes more stringent localisation policies - is currently in suspension until a crucial legal review in February 2018. 'Africa Mining: The Four Key Themes', September 28 2017
Tanzania Fallout From 2017 Regulatory Overhaul The Magufuli administration's overhaul of the mining regulatory framework in 2017 has put the country's largest mining company, Acacia Mining, at risk. The outcome of ongoing negotiations between the miner and government will be crucial to determine the short-term future of Tanzania's mining sector. 'Africa Mining: The Four Key Themes', September 28 2017

5. China To Generate Significant Volatility In Metals Markets

China will continue to generate significant volatility for the mining and metals industry globally in 2018, as the country is the largest global consumer and producer of most metals and ores. The 19th National Party Congress in October 2017 saw significant consolidation of power around President Xi, and his emphasis on reforms during speeches indicate that the pace of reform will accelerate in 2018. From a demand angle, the refocus of economic growth away from heavy industries to services will slow demand for industrial metals going forward. The cooling of fiscal stimulus to the infrastructure and construction industries that started in H217 will continue, capping new demand for ferrous metals in particular.

Chinese Supply Reforms Could Affect Metals
China - Share Of Global Metal Markets (%), 2018f
f = BMI forecast. Source: National Sources, BMI

On the supply side, our core view is that environmental-based reforms will be gradual and ultimately have limited impact on China's production balances and thus import requirements. Significantly more aggressive reform of state support for commodities producers than we anticipate, however, poses an upside risk to metal prices. In particular, we see metals such as steel, aluminium and copper at risk of a supply crunch as the government looks to curb production growth (in the case of steel and aluminium) and ban some scrap metals imports for environmental reasons (in the case of copper). As global markets attempt to price in the implications of China's industry reform over the coming months, prices could experience significant volatility.