2010 12 14 ft boost for suppliers as miners dig deep

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FT Home>Companies>Energy>Mining

Oil services eye industry

upturn

The oil services industry isgearing up for anotherspending cycle as oil and gascompanies boost their capitalexpenditure plans afterenjoying a prolonged period ofstable crude prices, writesSylvia Pfeifer in London.

Boost for suppliers as miners dig deepBy J avier Blas and WilliamMacNamara in LondonPublished: December 14 2010 19:30 | Last updated: December 14 2010 19:30

Samuel Brannan became the richest man in California during the states Gold Rush of 1849;although he never found a lump of bullion. He made his fortune selling shovels and picks to thegold-seekers.

Fast forward 150 years and the modern version of Mr Brannan the mining services companies are ready to profit as mine rs boost their i nvestment above the reco rd set in 2008 at thepeak of the commodities boom.

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We are entering the earlier stages of another multiyear expansion of the industry, says MikeSutherlin, chief executive ofJoy Global, one of the worlds largest manufacturers of miningequipment, such as huge excavators.

J ohn Beevers, chief executive ofOrica Mining Services, a Melbourne-based company that is oneof the largest suppliers of explosives to the mining sector, adds: A lot of fresh money is going toexploration and mining expansions.

The climate of optimism is in complete contrast to the past two years, when miners slashedcapital expenditure to preserve cash amid the global economic crisis, hurting the services

companies that depend on their contracts.

Industry executives estimate the worlds miners, including companies such as BHP Billiton,

Vale, Rio Tinto, Xstrata andAnglo Ame rican , will boost their investment to about $115bn-$120bn in 2011, above the previous record of $110bn. In the 15 years before the start of thecommodities super-cycle in 2003, miners spent on average less than $40bn a year.

Capital costs are now exploding, says J ulien Garran, commoditiesanalyst at UBS, adding that in an eerie reminder of the 2007-08period of cost inflation, he was hearing executives talk about 20-30per cent annual increases for certain projects.

For the worlds biggest mining companies, late 2007 and 2008 was abittersweet time. On one hand, they were enjoying the benefit of

record prices for metals and minerals; on the other, boominginvestment led to escalating input costs for explosives, drills andother equipment, which cut into their profits.

As a result, mining groups are taking measures to prevent a repeat of such imbalances as thebull market ramps up again.

Kazakhmys, the London-listed miner, recently said it hadalready ordered large-scale, precision-engineered equipmentthat it would not need until 2015 at the earliest. Over the nextyear, the sort of big-ticket equipment it ordered might facelonger delays than more standard pieces of kit, such astrucks. Only a handful of companies including FLSmidthandABB produce such large mining equipment, which canoften lead to supply bottlenecks.

For the past two years big miners like Anglo American and

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Chevron, the USs second-biggest oil company, has ledthe way, announcing last weekit would boost its capex to$26bn next year. Most of itspeers are expected to followsuit.

The spending plans are beingcarefully watched by analysts.

The services industry hasstruggled as the globalrecession curbed energy use,prompting some oil and gascompanies to cut spending on

projects. However, mostanalysts believe the sector ison the cusp of an upturn.

A recent flurry of deals General Electric agreed to buyWellstream of the UK onMonday for about $800m,while Wood Group is buyingPSN for $955m is also beingseen as a sign of confidencereturning to the sector.

Mick Pickup, from BarclaysCapital, said that while the oilservices sector had not yetseen an uptick in costs, it wasonly a matter of time. The firstplace we would expect to seesigns is in the seismiccompanies.

Petroleum GeoServices, aNorwegian services company,said on Tuesday it wouldbegin paying a dividend nextyear for the first time since2007.

Andrew Gould, chairman andchief executive ofSchlumberger, the worldslargest oil services group, alsosounded a bullish note inOctober at the companysthird-quarter results, notingthat favourable activity,coupled with robust pricingpower for pressure pumping

and the effects of ourrestructuring efforts led to amajor improvement inmargins.

Rio Tinto have been working to streamline their equipmentprocurement buying from fewer companies but with longer-term guarantees. Anglo has such a deal with Komatsu fortrucks and other kit.

The strength of your relationships with your suppliers isabsolutely key to ensuring on-time delivery of major projects,says Andrew Hinkly, Anglos head of supply chains.

Global framework agreements with our major suppliers ...provide enhanced security of supply and improved commercialterms, both of which are critical in a high demand market.

Among those suppliers, the manufacturers of earthmovingequipment such as excavators and trucks, undergroundequipment such as drillers, and other heavy equipment, will bethe main beneficiaries of the spending spree.

Large companies in the sector include Caterpillar, whichrecently bought rival Bucyrus for nearly $9bn, and JoyGlobal , both listed in New York. Besides, Komatsu of J apan,Stockholm-listedAtlas Copco and Sandvik, and Sydney-listed Boart Longyear, are also among the top in the sector.

Besides, explosive companies such as Orica and Bulk MiningExplosives, part of J ohannesburg-listed Omnia, are also likelyto benefit. Contractors such as Betchel and Fluorof the US,

Leighton of Australia, Weir Minerals, part of London-listed

WeirGroup, and Hatch of Canada, among others, will alsogain.

The sector is attracting large amounts of money as investorsbet on increasing profits and a round of mergers andacquisitions among publicly listed and privately heldcompanies.

Among those listed, share prices have surged between 20 and150 per cent. Alex Krueger, managing director at FirstReserve, the $20bn natural resources private equity investor,says that the mining services sector has seen a re-rating asinvestors price in the upside associated with the increase inactivity.

Private equity investors are also building exposure. Earlier thisyear, First Reserve took a majority stake in Calibre Global, aPerth-based engineering group involved in iron ore projectsand railways links between mines and ports in Western

Australia.

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2010 12 14 ft boost for suppliers as miners dig deep

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