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EY’s report indicates the value of mining equipment is in “freefall” while the construction equipment market is showing signs of recovery.
EY’s report indicates the value of mining equipment is in “freefall” while the construction equipment market is showing signs of recovery.

Report suggests opportunity in declining yellow goods

A new report indicates that the underutilisation and subsequent fall in value of equipment in the mining sector could present a “once in a lifetime” opportunity for operators seeking to build their load and haul fleet.

According to the 2016 Australian Yellow Goods Report recently released by advisory service EY (Ernst & Young), minimal demand and over-supply led to a “freefall” in the value of mining “yellow goods” over the past year.

The report indicated that the market for mining-specific equipment had shifted between decline and stagnation for the 12 months ended 30 September 2015, with auction clearance rates sitting at about 60 per cent.

Over those 12 months, the mining sector recorded a 30 per cent decrease in the value of low hours/late model equipment. The figures were similar for the value of higher hours equipment, which experienced a 22 per cent drop from September 2014 to September 2015.

EY’s Australian Mining Fleet Value Index – which analyses the change in market value of a notional load and haul fleet for a mid-sized mining operation over a six-month time period – also showed a 46 per cent decline over the same period.

Paul Murphy, EY’s mining and metals transactions leader for the Oceania region, said it was unclear when the market would start to improve. “Further declines in commodity prices make it extremely unlikely the yellow goods market for mining equipment will see any recovery this year,” he stated.

Conversely, the market for construction and general purpose equipment was said to be showing signs of improvement, with auction clearance rates above 70 per cent.

EY analysis showed an eight per cent recovery in the value of low hours/late model equipment between September 2014 and September 2015, with the values for higher hours equipment remaining “steady” within that period.

It was noted that the current value of yellow goods for both the mining and construction segments was still below the market levels recorded in September 2013.

Signs for optimism

Despite the declining results, Murphy pointed out that not all the forces influencing the yellow goods market were negative. He noted that the low Australian dollar would likely attract overseas buyers and said lenders and financiers had shown a reluctance to crystallise losses.

“There is increasing underutilisation and assets are just being parked up, but provided there is some general servicing of interest, lenders and financiers are showing a lot more patience rather than [trying to sell] assets into a weak or non-existent market,” he commented.

Murphy also said a lot of the mines that had ceased operation in 2015 had been placed into “care and maintenance”, with operators hoping to sell them as a going concern instead of closing them. As such, he said it was unlikely that equipment from these mines would be put on the market.

“Values are at historical lows so for anyone with scale, the finances and nerve, there is the potential to opportunistically assemble a mining equipment fleet at once in a lifetime prices,” he said.

“Disruptive business models to exploit underutilised capacity in the accommodation and people transportation industries have been a phenomenon. We have significant underutilisation in mining fleets and yellow goods more generally so the conditions are right for a disruptive business model to enter this space.”

EY’s analysis was based on data from Industry Results, which provides information on retail, wholesale and auction sales in Australia’s mining, earthmoving, transport and agricultural industries.

The full 2016 Australian Yellow Goods Report is available at www.ey.com

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