PERTH (miningweekly.com) – Mining services providers would need to look at diversification, efficiencies and innovation if they were to survive in the current commodity climate, advisory firm EY reported on Friday.

In its most recent analysis of ASX-listed mining services companies, EY noted that while the scale of business failures had not been as significant as anticipated, the average sector debt levels and ongoing focus on cost continued to place pressure on businesses.

EY Oceania restructuring leader Vince Smith said on Friday that the number of mining services companies had dropped by 8% in 2014, with companies exiting the index owing to failure or mergers and acquisition (M&A).

“Despite this, the total market capitalisation of the index of listed mining services companies has increased by 7%, against a 15% increase in the market capitalisation of the ASX All Ordinaries Index,” he said.

“With total debt for mining services companies still at historical highs, and capital investment by the mining sector forecast to fall a further 10% in 2015, conditions are only going to get tougher for those in this sector who are unable to adapt.”

The analysis also indicated a widening valuation gap between diversified and specialised mining services companies, with specialised mining companies trading below diversified ones.

Smith said that diversification provided resilience against the increasing market volatility, with a perception of lower risk, which was being rewarded in the market.

He further noted that the increasing focus of mining companies on productivity meant continuing pressure on service companies to deliver further efficiencies, demonstrate increased value or to be able to differentiate themselves through innovative services or solutions.

“Mining services companies that have strengthened their balance sheets and innovated to differentiate themselves are well positioned – but the tough times will continue for the rest.”

EY Oceania mining & metals transactions leader Paul Murphy added that the relentless pressure on the services sector to reduce costs, achieve scale and invest in innovation and productivity, is likely to mean more M&A activity.

“Conditions have been ripe for significant industry consolidation and M&A in the sector for a few years now and we are only now starting to see activity. We believe we are on the cusp of consolidation in 2015, given the need to diversify and leverage size and scale,” said Murphy.