The mining sector is feeling the impact of the economic slowdown and investor wariness related in part to a lack of certainty around Brexit and ongoing trade tensions, primarily between the U.S. and China.
The IMF cited increasing trade barriers as a factor for the "synchronized slowdown" in the global economy, with expectations for growth in 2019 downgraded to 3%. "This is a serious climbdown from 3.8% in 2017, when the world was in a synchronized upswing," the organization said in its most recent semiannual "World Economic Outlook."
A PricewaterhouseCoopers report earlier in 2019 said the top 40 mining companies have shown steady growth this year while predicting challenges for the sector amid ongoing volatility and uncertainty related to trade wars, geopolitical crises and climate change.
John Meyer, an analyst at U.K. broker SP Angel, said in an interview that investors had been discouraged by the lack of clarity around Brexit. "Markets hate uncertainty," Meyer said, adding that investors would delay decisions until the business environment stabilizes.
Australian mining company Iluka Resources Ltd. attributed lower-than-expected zircon sales volumes in the first six months of its financial year, which ended June 30, to trade tensions, Brexit, and "Iran, Turkey and India faltering." During an Aug. 20 conference call, CEO Tom O'Leary said the mining company expected performance in the second half to be at the lower end of expectations after noting that uncertainty in the global markets during the second quarter had "affected customer sentiment and ultimately purchases."
In September, U.K.-based Sirius Minerals PLC canceled a US$500 million bond issue required to refinance its preproduction-stage Woodsmith mine in the country. Sirius said the company and its advisers did not believe that the bond sale would be achievable in light of "market conditions, the ongoing uncertainty surrounding Brexit and the political environment in the United Kingdom."
Meyer said the lack of clarity surrounding the outcome of Brexit negotiations, the U.S.-China trade war, and the EU had all contributed to investor wariness.
"Brexit uncertainty has not helped in attracting financing to the smaller companies," Meyer said, adding that market volatility has weighed on the value of the pound sterling, which makes it more expensive for U.K. companies to pay for drilling contracts denominated in dollars. Meyer said that it would not matter to investors if the U.K. exits the EU with or without a deal, so long as they could plan for it.
The mining industry is seen largely as a global industry protected from Brexit, with the majority of these companies earning in dollars. Gold miners, in particular, benefited from the economic uncertainty as investors view the precious metal as a safe-haven asset.
Data from the U.K. Office for National Statistics, or ONS, shows that between 2016 and 2018, business investment in the U.K. mining and quarrying sector fell 61%. An overall slowdown in the British economy saw business investment fall 0.4% between 2017 and 2018.
"The last time business investment fell compared to the previous year was 2016, when it fell by 0.2%," while "the last time business investment saw a larger fall was in 2009, when it fell by 16.6% compared with 2008," the ONS said in a report covering the December quarter of 2018.
The ONS report considered the net investment by private and public corporations in sectors including transportation, information and communication technology equipment, and other machinery and equipment, as well as buildings and structures.
The report said data suggests that the mining and quarrying industry made the largest negative contribution to the 4.3% fall in investment in machinery and equipment between 2014 and 2017.
Business investment in the U.K. mining and quarrying sector substantially recovered in the first half, rising 104% year over year to £3.83 billion. Investment is still 40% down compared to the first two quarters of 2016 when £6.41 billion was spent, with 2018 seeing the least investment in the last four years at £4.55 billion.
Jerry McLaughlin, executive director of economics and public affairs for the U.K. Mineral Products Association, which represents suppliers and quarries in sectors including cement, concrete and silica sand, told S&P Global Market Intelligence that the market was relatively stable but had been subdued in volume terms over the last two years. However, it was difficult to gauge how much of this was due to the "Brexit effect" or whether other factors had contributed, McLaughlin said.
In volume terms, the main market is construction, McLaughlin said. "Where we have seen the Brexit effect has been more about the expectation that economic activity would not be as strong so the construction market would be more constrained," predominately in housing and infrastructure. McLaughlin said that in terms of infrastructure work, there has been a growth in energy facilities and transport, but there was a degree of skepticism as the pace has been quite slow.