Mining services companies shares outstrip oil peers

Mining services companies index rising

Mining services companies have performed better than their oil sector peers, buoyed by spending on new technology and a more bullish outlook for the mining industry.

According to a Reuters report, the index of mining services companies, including Atlas Copco, Sandvik and Metso, have increased by over 50 per cent in the past year.

Longer and shorter term prospects and more orders are brightening the outlook for mining service companies.

Sandvik says the increase in demand for automation, which as it represents a small part of the mining sector, shows good growth potential.  In the oil sector, however, analysts say spending is focussed on maintenance or expanding existing production.

“If you’re an oil guy who lives off building new subsea structures and new pipelines, this is a very worrying trend,” said Nicholas Green, senior equity analyst at Bernstein, in an interview with Reuters.

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Oil services’ index has barely moved and companies like Saipem, Technip FMC and SBM Offshore are struggling with the thinnest order books in 13 years.

The European oil services sector is especially bleak, according to analysts.

“For most of the markets that the European oil services companies serve, it’s almost arithmetically impossible for revenue to go up this year,” Alex Brooks, equity analyst at Canaccord Genuity, told Reuters, referring to a drop in service contracts.

With oil prices stubbornly sticking at around $50 per barrel, any increase in activity for offshore oil services companies is unlikely.

While mining services companies are looking at a stronger outlook, the commodity price crash in 2015 is making them unwilling to risk shareholder dissatisfaction by undergoing new projects.

According to Reuters, most of the spending is being used to boost current mine output and to use new technology to cut costs and improve margins.

Mining executives say a quicker adaptation from gasoline powered vehicles to electric will mean a boost to the sector as consumption of minerals including copper and cobalt increases.

“Technology is bad for energy consumption and for some metals, it could be very good,” Jefferies analyst Chris LaFemina told Reuters.

But there are concerns for the industry, including the economic wellbeing of China, the world’s largest commodities consumer. Such worries are capping growth across the resources sector, says LaFemina.

Major mining companies that led gains of Britain’s FTSE-100 stock index in 2016 have lost momentum this year.  Iron ore, the commodity closely linked to their performance is slightly weaker than at the beginning of the year after a 300 per cent gain in 2016.