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Orica Whisper

Orica Whisper
 

Research Question: Will there be an even bigger decline in the explosives industry given the drop-off in mining associated with coal and iron ore?

Companies Covered: Orica (ORI), Dyno Nobel Inc.

Report Available: April 29, 2015

 

Blueshift’s initial research shows mines in both iron ore and coal production slowing as China’s demand for iron ore decreases dramatically, resulting in less demand for explosive produced by Orica and others. This trend could progress negatively as mines continue to oversupply the market or Orica could benefit from increases in specialized explosives and quantity of explosives sold as miners dig deeper mines.

 

Observations

  1. Mines in the Pilbara iron-ore mining hub of northwest Australia experienced slower growth as there is a severe oversupply of iron orein the global market. This oversupply continues to push prices down and close mines, at the same time as China’s demand for iron ore decreased to 205.86 million tons last year, from 313.8 million tons in 2013. Additionally, Intelligence firm predicts 17% of the coal production in the U.S. this year will idle and faces additional pressure from alternative fuels. The explosives manufacturing industry is being directly affected by these factors, as  well as rising operating costs at mines, and higher development expenditures in the face of lower grade ores. This has caused annualized growth rate estimates to drop from 10.2% to 2.2% in 2014-15. Lack of demand for explosives has resulted in Orica laying off 700 employees.
  2. Revenuefor the explosives industry, however, is predicted to reach an all-time high of $3.6 billion in 2014-15, from $2.2 billion five years ago. This growth is due to declining mine grades with miners digging deeper, resulting in higher volumes of explosives used, including moretechnologically advanced explosives designed to be more energy efficient with greater accuracy. India could be a bright spot for explosive manufacturers, as the country looks to double coal production by 2020. Another factor that could help boost the explosives industry is the recent turn around in productivity for coal due to increased efficiency of sites.
  3. Blueshift’s September 2014 report found that all sources expected iron ore prices to remain flat or decline over the next year. The nine sources predicting price declines expected a spot price ranging from $70 to $80 per ton for 2015. One source predicted long term pricing in the $50 to $60 range. China’s economy, which drives worldwide demand for iron ore, was expected to experience slower growth in the range of 3.5% to 5.5% year to year. Emerging markets such as India, and MINT (Malaysia, Indonesia, Nigeria, and Turkey) were not expected to grow demand significantly in the near-term. Sources attributed the surplus of iron ore to new mining projects throughout the industry coming online and the specific effort of major producers to reduce competition.

 

Will Orica continue to experience a decline in sales as the iron-ore and coal industries experience slower growth and shut down, or has the industry reached its low point? Blueshift will gather data and issue a market research report from independent sources in the following areas: supply chain, explosives sellers, equipment and mining operators, and industry specialists.

 

To see other ideas Blueshift Research is currently working on, please click here.