Copper continues to have the best fundamentals of the mined commodities. Since reaching record highs in June, global inventories have declined 14 percent and prices have rebounded 10 percent. Additionally, inventories at bonded warehouses have declined 50 percent since the first quarter. These developments are supporting continued investment in mine capacity expansion.
Our customers’ declining cash flows have resulted in significantly reduced capital expenditure budgets, as much as 40 to 50 percent on an aggregate basis. Customer capital expenditures are expected to remain at this level until demand improves enough to move commodity pricing above marginal cost and toward incentive levels. While there are a number of high grade projects in process, some later stage projects have been slowed so that they do not get ahead of the market.
“The conditions in our end markets are dominated by supply surplus and reduced demand growth for most commodities,” added Sutherlin. “This is forcing mines with higher production costs to close to rebalance the market. Our customers continue to move forward with a select number of expansion projects, which will come online with costs low on the global cost curve. Even so, customers remain cautious, especially regarding timing. A couple of projects have recently announced delays of six months, and others are experiencing slippage quarter to quarter. Our project tracking list has increased this quarter as our customers continue to set their longer term priorities. However, the list is back-end loaded, and project slippage has become common under current market conditions. This means that improvement in the prospect list is not expected to have a significant impact on our 2014 order rate. This is consistent with our view that the market will continue to be more challenging before it starts to improve.”“Our aftermarket will continue to see headwinds as mines are taken out of production and volumes decline to balance the market. The U.S. coal sector has gone through that correction, and it took four to five quarters to adjust down, stabilize and start to recover. U.S. parts volumes are now on an improving trend and rebuilds are coming back into scope. That correction process has moved to Australia and China as customers in these regions deal with supply surplus domestically and in the seaborne markets. We believe that Australia is midway through its correction and China is in the early stages. The downside of these corrections includes reducing parts inventories held by customers at mine sites and extending the time between rebuilds. This results in an early over-correction that is then normalized. The impact of this rolling correction is expected to last through most of next year. Not all regional markets are expected to be affected, but the correction in some of our largest markets will not be fully offset by aftermarket growth in other regions in the near term.”