With a mid-term expectation of relative supply/demand balance, a focus on cost control is imperative to ensure margins remain acceptable and acceptable free cash flows continue to be generated. Everyone wants to be on the bottom half of the cost curve but not everyone can be. We are seeing the larger, lower cost producers continuing to drive production increases as a means of lowering unit cost and focusing heavily on productivity linked labor and supplier negotiations. Smaller, lower volume operators have a much more difficult challenge to drive productivity increases given their relative negotiation power with suppliers and their workforce and risk drifting from being marginal to uneconomic without structural changes that also focus on reducing perceived fixed costs.
Investors are keeping a watching brief on the managed growth story from China which is a key driver in delivering the demand, shifting the market into a supply deficit beyond the medium term, and thereby helping sustain and drive longer term price increases. Poor historical experience around project cost control also lends itself to increased investor skepticism around project payback and overall return.
Contributing to the uncertainty in investors’ minds to commit capital are the community and stakeholder issues, particularly what greenfield projects, are experiencing. Access to water and power, addressing environmental concerns and maintaining health and safety standards are all influencing factors. We are seeing operators or new entrants who are measuring and have a defined methodology for assessing the effectiveness of their actions and relationships as being ahead of the curve in foreseeing and keeping ahead of community and stakeholder concerns.
"We are seeing the availability of capital to finance expansion or new projects as a continuing challenge."
- Daniel Camilleri
KPMG in Chile