Caterpillar Inc. earth moving equipment in Illinois. In its second-quarter earnings call, Caterpillar repeatedly referenced supply chain obstacles that drove equipment prices higher through the first half of 2022. Source: Scott Olson / Staff / Press Release via Getty Images News |
Supply chain disruptions are pushing up the price of machinery and raw materials, driving increases in production costs for equipment manufacturers and end-users who are rethinking their existing equipment fleets.
During second-quarter earnings calls, multiple miners and equipment manufacturers pointed to challenges in obtaining needed materials or equipment. These difficulties are increasing costs even as miners and manufacturers contend with high energy prices in Europe, rising inflation, and fluctuating base and precious metal prices.
"In certain situations, no amount of begging and pleading with suppliers [will] get you more equipment or components; sometimes the supply chains are what they are," Paul Tomory, executive vice president and chief technical officer of Kinross Gold Corp., said in the company's second-quarter earnings call.
Shifting mining equipment sources
Andrew Bonfield, CFO of Illinois-headquartered Caterpillar Inc. explained during a May event that a series of factors have increased equipment manufacturers' costs, including "rapidly increasing manufacturing costs due to inflationary impacts of higher material costs."
The global equipment shortages persisted throughout the first half of 2022. Ultimately, supply chain disruption drove Caterpillar's sales below the company's expectations, Caterpillar Chairman and CEO James Umpleby said during the company's second-quarter earnings call.
Caterpillar’s overall sales to users declined 3% compared to the second quarter of 2021, with machine sales decreasing by 4%.
"These constraints were mostly due to component shortages, which resulted in production delays and shortfalls against our schedules," Umpleby said.
Caterpillar declined a request for further comment.
Thomas Palmer, president, CEO and director of global gold miner Newmont Corp., said during a second-quarter earnings call that "several of [Newmont's] major equipment and part suppliers have recently issued comprehensive price increases for the industry that range from 15% to 30%."
While miners want more equipment, manufacturers said the necessary raw materials to make that equipment, including some mined products, are in short supply or increasingly expensive.
Prices for iron ore, used to make steel which is used in mining equipment, fluctuated throughout the past 12 months. Prices hit a high of $182.51/tonne on Aug. 4, 2021, retreated to a low of $91.98/t on Nov. 9, then rose to a 2022 year-to-date high of $161.84/t on Apr. 4. A key driver of the shifts in price have been short-term demand fluctuations resulting from global COVID-19 shutdowns.
Warrior Met Coal Inc., an Alabama-based producer of metallurgical coal for steel production, also said its business has been affected by supply chain constraints. The miner said its cash cost of sales averaged $123.03/ton in the second quarter, a 48% jump from the year-ago period, according to its most recent earnings release.
"We continue to see rising inflation and long lead times impacting our business for the remainder of this year," said Warrior Met Coal CEO and director Walter Scheller in the company’s second-quarter earnings call. "[Despite] our improved productivity at the mines, we are experiencing 25% to 35% increases in cost of operating supplies and materials, repairs and major equipment rebuilds."
A possible path forward for new equipment consumers could be found in purchasing used equipment or buying replacement components for aging equipment repairs.
Denise Johnson, group president of Resource Industries at Caterpillar, said in a June 2022 investor call that Caterpillar has observed "definite trends towards extending the life of machines." In the same call, Johnson estimated the average age of Caterpillar assets is 12.6 years, making aging fleets a promising avenue for the growth of Caterpillar’s service and part sales divisions.
Other equipment manufacturers, like Japan-based Komatsu Ltd., have already seen a shift to equipment repairs as supply chain disruptions made it difficult for miners to purchase new equipment.
"In the [fiscal] first quarter, due to the procurement delay of the components … sales of equipment were weak but component sales increased proportionally," Masatoshi Morishita, senior executive officer and general manager of the business coordination department at Komatsu, said in the company's quarterly earnings call.
The limited supplies of mining equipment have had varying impacts on miners' activities and forced them to make unusual sourcing choices this year.
Responding to an analyst's question about the slower-than-expected expansion of Kinross Gold's La Coipa gold mining project in Chile, Tomory suggested Kinross has needed to purchase alternative components as placeholders, when its first choice has been unavailable, to avoid the worst of project delays.
"We are buying replacement components proactively where we can," Tomory said on Kinross' second-quarter earnings call. "But it's not something we can do perfectly everywhere."
Newmont and Lundin Mining Corp. executives indicated on recent calls with analysts that their companies have faced similar obstacles.
Palmer said that Newmont's new Subika Underground mine at its Ahafo operation was impacted by the delayed delivery of production drills. Lundin Mining did not point to any specific operational delays, but instead indicated it shifted procurement tactics to avoid production impacts.
"We have procurement strategies in place, which are mitigating the impacts associated with global inflation and supply chain delivery, though as with many of our peers in other industries, we are experiencing continuing risks with these," Lundin Mining President, CEO and director Peter Rockandel said.
In its second-quarter earnings release, Lundin Mining cited "higher consumable costs" as the primary driver of heightened production costs at its Candelaria, Chapada and Eagle projects, although its overall production volumes for copper, zinc, nickel and gold remained roughly in line with its outcomes one year ago.
Newmont and Lundin Mining did not respond to requests for further comment.
Russian miners face unique challenge
For some Russian miners, equipment supply constraints have been compounded by a need to shift dependence onto Chinese equipment in light of Russia's invasion of Ukraine.
"We have faced unprecedented supply chain disruptions, mostly related to the decision of many mining and processing equipment manufacturers to leave Russia," Polymetal International PLC CEO and executive director Vitaly Nesis, said in the company's second-quarter earnings call.
Polymetal, which mines precious metals, has 27 active mining projects, 23 of which are in Russia. "For example, Nezhdaninskoye [gold and silver mine] was delayed by a full year precisely because of the need to reengineer away from European equipment towards Chinese equipment," Nesis said.
Polymetal did not respond to a request for comment.
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