No silver lining for miners

The silver, lead and zinc sector faces a difficult year, as falling global demand and collapsing prices sink sales.

 

It’s been a golden age for Australia’s silver, lead and zinc producers. IBISWorld estimates that the industry expanded at an average annual rate of 10.7% over the five year period to 2008-09, reflecting soaring US dollar prices for zinc, lead and silver, as well as generally higher levels of production. Despite the appreciation of the Australian dollar over this period, zinc, lead and silver prices also rose in Australian dollars.

But by last year, the party was quickly coming to an end. The strengthening of the Australian dollar, together with lower US dollar zinc prices and flat lead production resulted in a significant decrease in revenue in 2007-08, with higher costs adversely affecting profits.

A sharper drop in revenue is forecast for 2008-09 due to lower prices and lower output. Only silver looks like bucking the general resources trend, with production expected to increase modestly.

The next two years look extremely difficult for silver, lead and zinc producers, with IBISWorld predicting a massive 32.2% fall in revenue in 2009. Over the five years to 2013-14, we forecast that this industry will contract at an average annual rate of 1.6%.

Increases in production are expected for zinc, lead and silver, as established mines increase production and new operations come on line. Prices of lead and silver are forecast to decline throughout most of the outlook period. On the other hand, zinc prices are set to rise moderately.

The positive effects on revenue flowing from higher output and a generally weaker Australian dollar will be offset by much lower US dollar zinc, lead and silver prices. Revenue growth will not be even, but is expected to fall during most years of the outlook period.

Still, it is important to note that the slight drop in revenue over the outlook period comes after a period of extremely strong growth in the past five years.

Key success factors for operators in the industry

• Availability of resource. Access to large, high-grade deposits of lead and zinc.
• Having contacts within key markets. Links with the metal traders which ultimately sell the refined zinc and lead products.
• Output is sold under contract – incorporate long-term sales contracts. Ownership links or long-term contracts with downstream processors of the ore or concentrates produced in the mining and milling operations.
• Downstream ownership links. Ownership links or long-term contracts with downstream processors of the ore or concentrates produced in the mining and milling operations.

Products and service segmentation

Industry turnover by state

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au