Australia: End of the mining gloom?

By Siobhan Lismore-Scott, Laura Syrett
Published: Wednesday, 26 November 2014

The downturn of the global “commodities supercyle” and slowing raw material demand in China has been felt keenly in Australia’s resources sector. But while proponents of Australian mining admit the industry isn’t quite as mighty as it used to be, they say that there are still plenty of reasons to be positive Down Under, Siobhan Lismore-Scott, Editor and Laura Syrett, Prices Editor, discover.

For most of the last decade, mining countries around the world have regarded Australia with wide-eyed, if faintly grudging, admiration.

As a mineral-rich, politically stable Western democracy with a mature economy and skilled workforce on the doorstep of raw material-hungry Asian economies, Australia was ideally placed to net the rewards of the seismic upswing in global mineral demand which took place between 2000 and 2012.

In step with what economists have labelled the "commodities supercycle", led by mushrooming growth in China, what emerged in Australia was a 10-year mining investment boom.

Miners scrambled to ramp up capacity to take advantage of soaring demand and mineral prices, ploughing billions of dollars into new road and rail infrastructure, processing facilities and recruiting everything from engineers to camp cooks. According to a report published in August 2014 by the Reserve Bank of Australia (RBA), the boom represented "one of the largest shocks to hit the Australian economy in generations", tripling the global price of Australia’s mining exports over the last decade. 

Investment spending by the mining sector quadrupled from 2% to 8% of national GDP over the same period, while per capita disposable household income increased by 13% as real wages rose by 6%, unemployment fell and the value of the Australian dollar appreciated, the RBA report found.

Unfortunately for Australia, demand for its minerals peaked and began to cool just as much of its newly built capacity began to come online.

The global economic crisis of 2008 hit raw material consumption in many of the world’s biggest economies, including the Japan, the European Union and the US and China’s double digit economic growth started to slow from around the end of 2010, and has officially fallen to around 7% today.

Prices for iron ore, Australia’s largest mineral export by volume, have crashed to as low as $70/tonne; private sector capex spending on mining has declined by 10.9% in the last year; and engineering construction 

has fallen by 6.5%, data released by the Australian Bureau of Statistics (ABS) revealed in August.

Chins up Down Under

Australia’s official responses to the downturn in its resources cycle have been mixed, although many are typically stoical.

"We don’t talk about a 'mining boom’ as such - the boom was actually in the construction cycle and it had to level out at some point," Kevin Skipworth, agent general for the Western Australian Government’s (WAGO) European office, told IM.

He said that WA’s mining industry is now moving from building to production which, although lagging the headline growth figures achieved through capex spending, is beginning to yield the more sustainable benefits offered by mineral sales revenues.

WA’s capital, Perth, remains a leading destination for national and international mining businesses to establish, Skipworth adds, thanks in part to the status of the Curtin University as a pioneering institution for mining research and technological innovation, combined with the city’s wealth of specialised legal, financial and insurance services for the resources sector.

Queensland Resources Council (QRC) takes a similarly positive view. "Far from a 'collapse’, what we are seeing in Queensland is a transition from a 10-year construction boom to the production phase," Michael Roche, CEO of QRC, told IM.

He notes a there is now a greater focus on the energy commodities, coal and gas, but stresses that the boom has raised Queensland’s profile as a global centre of mining excellence - a reputation that will endure and continue to benefit the state, even as capex on Queensland’s mining fields is rolled back.

"It’s no coincidence that Brisbane is home to many corporate and academic global technology centres including JKMRTech, the Sustainable Minerals Institute, Centre for Mined Land Rehabilitation and Cooperative Research Centre for Mining," he said.

Other states have been more frank about the need to transition to a different, diversified type of economy. Mike Baird, former treasurer and now premier of the New South Wales (NSW) government, acknowledged that NSW had benefitted from the mining boom but said the state’s diverse business interests meant it was well placed to build its economy outside the resource sector.

"Our strength has always been our diversification and as we move beyond the mining investment stage and move into (…) a services and agriculture based future, NSW is incredibly well positioned," Baird said in response to a Deloitte Access Economics report published in October 2013, which estimated that a shift away from mining could generate A$250bn ($217bn*) for NSW over the next 20 years.

Far from turning his back on mining, though, in November 2014 Baird pledged to introduce planning reforms that will halve the time it takes to approve "state significant" infrastructure projects in NSW and came down hard on the "disrupting activity" of anti-mining protestors.

Competitiveness

One of the major concerns facing Australia’s mining industry is that many of its operations, predicated on high prices and strong demand, have effectively priced themselves out of the post-boom market.

The country has seen a swathe of mine and plant closures across Australia in the last two years, including Penrice Soda Holdings’ soda ash plant in Osborne, South Australia and the mothballing of Galaxy Lithium’s Mt Cattlin lithium mine in WA, as well as large scale shutdowns of coal mines in Queensland and NSW and the suspension of huge iron projects in WA.

Many of these closures have been put down to the country’s lack competitiveness in a weaker pricing environment, compared to other countries around the world.

QRC’s Roche admits that remaining competitive is crucial to successfully riding out the period of transition from construction to production in the mining industry.

"Global competitiveness is central to the long-term future of the resources sector in Queensland," he told IM. "We can’t assume customers will beat a path to our door based on our past performance. There’s no brand loyalty in commodities."

A Minerals Council of Australia paper entitled "Australia’s Competitiveness: Reversing the Slide", was released in September, and focused on how Australia’s resources sector can enhance its international competitiveness.

"Overly expansionary fiscal settings of federal and state governments in the wake of the crisis, settings that have yet to be fully reversed, have contributed to the [Australian] dollar’s strength and been a major source of our competitiveness problem," Griffith University professor, Tony Makin, who authored the report, states.

"Interpretations differ about the mining boom’s impact on Australia’s economy. On one hand, the 'Dutch disease’ perspective highlights the negative impact of a higher real exchange rate on the competitiveness of sectors outside mining. A more plausible and positive view emphasises pursuit of the economy’s comparative advantage which has raised national income and households’ international purchasing power," he adds.

Makin notes that Australia’s competitiveness rating by the World Economic Forum has slipped the top ten, to 21st place, but stressed that Australian-produced minerals are still marketable.

"While the boom-related appreciation of the exchange rate led to a loss of competitiveness, this does not imply Australia has been producing goods the rest of the world no longer wants. On the contrary, world demand for Australia’s natural resources has substantially increased," Makin said.

He concludes that in order to increase the country’s standing there needs to be a "national conversation about our international competitiveness".

"Australia will not durably improve its competitiveness without serious fiscal and structural reform, including labour market reform," he warns.

Wages

Liked to the question of competitiveness is the issue of wage growth. During Australia’s boom years, mining companies were competing for a shortage of both skilled engineers and 'blue collar’ workers to staff operations at mine sites, contributing to rapid nationwide wage inflation.

Although the cost of labour in Australia’s resource sector is acknowledged to be high, Skipworth argues that its position relative to other mining nations has been overstated.

"There is a perception that Australian costs are excessive, but if you look at the resource sector globally, they’re actually level pegging," he told IM.

He also points out that the slowdown in Australia’s mining industry and the consequent deepening of the labour pool has taken the heat out of salaries.

"Wages growth has more than halved in the last two years, from about 6% per annum down to around 2.5% today, as we’re not seeing that kind of critical demand for labour now," he said.

While the returning of skills to the market is a positive for controlling wages growth, it has also meant that many mining professionals are now struggling to find work, according to a report by the Australasian Institute of Mining and Metallurgy.

Figures released in October showed that mining industry professionals are experiencing unemployment levels double that of the national average, at 12.2%.

Geology professionals are facing a 15.1% unemployment level, while those fresh into the industry face over 26% unemployment.

The report also highlighted that workers are expected to work longer hours, and in some cases have been offered lower pay for the same job.

In WA, the workforce is expected to slip to 87,000 over the next ten years, according to a recent report published in Mining Australia and put together by CME and Deloitte Access Economics for the WA Chamber of Minerals and Energy.

It is hoped, however, that the diversification of Australia’s economy will help to take up some of the employment slack. ABS data showed that investment in non-mining industries increased by 4.9% in the last year and although domestic manufacturing declined by 6.9%, building construction, mainly in housing, was up by 6.5% over the same period.

Boom and dust

Another challenge now facing Australia is how to avoid the legacy of ghost towns, which are often left in mining areas once developers up sticks.

"History shows this classic mine and boom phase is either followed by an evolution into multiple but related industries, or a decline into ghost towns and tumbleweed," Jemma Green, a researcher at Curtin University said in a recent interview with the Financial Times.

According to the "Pilbara 2050" report, co-authored by Green, there are 87 ghost towns in WA alone, most of which are in former mining districts.

The CME-Deloitte report predicted that the proportion of fly-in-fly-out (FIFO) employees in Australia’s mining workforce will increase from 60% of the workforce, to 63% by 2020 - although this is expected to be due to a reduction in the overall size of the workforce, rather than an increase in the number of FIFO staff.

But WAGO’s Skipworth says that morbid decline need not be the fate of mining towns and points to the example of his own home town of Kalgoorlie (now known as Kalgoorlie-Boulder). "In the 1960s, everybody said that this would be a ghost town in 50 years, but today it’s thriving," he said.

Kalgoorlie, located 595km east of Perth, was founded in the late nineteenth century as part of the Yilgarn-Goldfields gold rush and is still the base for a number of precious metals operations, including the famous "super pit", measuring 3.6km by 1.6km and capable of producing 850,000 oz pa gold, the area around Kalgoorlie is home to the Mt Marion lithium-tantalum-mica project, which is being jointly developed by Reed Resources Ltd and Mineral Resources Ltd.

In WA, government is investing in building new towns through its flagship "Pilbara Cities" initiative. This scheme aims to create two new 50,000-strong, permanent communities at Port Headland and Karratha, in place of the existing 15,000-person settlements used as base camps for the region’s FIFO iron ore industry workforce.

"The aim is to establish new towns whose existence is not dependent on the iron ore price," explains Skipworth. 

The Pilbara scheme was hatched in 2010, at the height of the boom and Skipworth’s optimism notwithstanding, fears are mounting that the drop in mining construction and decline in iron ore prices could threaten the project.

QRC, meanwhile, says that offering choice about living and working arrangements is the most effective way of ensuring the most satisfactory outcomes for mining communities.

"The Queensland resources sector will continue to offer workers the chance to live locally or commute," Roche told IM.  

Independent research conducted for QRC involving more than 2,000 resources sector employees confirmed that some prefer to live locally, while others prefer to commute. "It’s a matter of personal choice that the industry must continue to cater for if it is to attract and retain skilled employees," Roche added.

Politics and regulation

Australia’s mining industry has had to battle against political and regulatory policies that have been viewed by critics as confusing and interventionist.

In July 2014, the country formally repealed the controversial Mineral Resource Rent Tax (MRRT), more commonly known as the carbon tax. This tax was levied on 30% of the "super profits" received from mining iron ore and coal in Australia. 

Although the carbon tax did not apply to industrial minerals, the measure was roundly criticised by the resources sector and revoked after scarcely two years - a move that won praise from miners but criticism from environmentalists.

The news was welcomed by WAGO, QRC, the NSW Minerals Council and the Australian Mines and Metals Association.

WAGO’s Kevin Skipworth told IM that WA had put the tax behind it. "We regard it as a blip for the industry that is best forgotten," he said.

"One of Australia’s biggest public policy mistakes in decades has been fittingly consigned to the dustbin with today’s repeal of the carbon tax legislation," QRC said when the repeal was announced.

In February, it was revealed that the tax only raised A$126m in the first six months of operation - a long way off the A$2bn the Gillard government had predicted.

Nevertheless, the carbon tax debate raised questions about the mining industry’s contribution to Australia’s national coffers and evoked assurances from the sector that it would acknowledge its obligations as a key contributor to the fiscal budget.

"Through higher mining company tax receipts and new fiscal measures, the industry will make a significant contribution to the budget and new government programmes," Brendan Pearson, CEO of the Minerals Council of Australia, said in a statement to the Australian senate when the MRRT was revoked.

The current pressures on Australia’s mining industry mean that any new resource policies are likely to be supportive rather than punitive, and as long as mining is perceived to be the backbone of the country’s economy, politicians seeking to wield influence will need to pay careful attention to the sector.

Australia’s incumbent Liberal Prime Minister, Tony Abbott, has been vocal in his support for the mining industry, promising and delivering the repeal of the carbon tax and outlining his vision of a new mining boom, partly through the abolition of other levies.

"I think the mining boom could only come again under a government which gets it (…) which abolishes all these other unnecessary taxes," Rudd said in the run up to the Australian general election in September 2013.

While his subsequent support for the nation’s coal industry has won him criticism from proponents of green energy in Australia and anti-FIFO campaigners, others have acknowledged that the mining industry will need to be eased through its transition to a new, potentially less-prominent position in the country’s economy.

*Conversion made November 2014

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Industrial minerals production in Australia

Australia is an important producer of a number industrial minerals and, importantly, has the reserves and infrastructure to be a leading producer of many more (see map). 

According to the US Geological Survey (USGS), Australia produced 940,000 tonnes ilmenite in 2013, 13% of total global output. Rutile production was at 450,000 tpa last year, accounting for 6% of global capacity. Reserves were estimated and 160m tonnes and 24m tonnes, respectively, in 2013.

The country further produces large amounts of zircon, with Iluka being the largest producer. 

Australia is also a significant lithium (spodumene and pegmatite) producer. Talison Lithium (now jointly owned by US-based Rockwood Holdings and China’s Sichuan Tianqi Lithium Industries) has an output of around 350,000 tpa hard rock lithium from its Greenbushes mine in WA, which can be converted into approximately 56,000 tonne lithium carbonate. 

Also in WA, Galaxy Resources’ Mt Cattlin pegmatite mine, which has been idled due to cost pressures and is also in the process of being sold to Tianqi, has the capacity to produce 137,000 tpa of lithium oxide.

The country has a modest magnesite industry, in which largest producer is Queensland Magnesia (QMAG), now owned by Sibelco.  The company’s Kunwarara mine is an open pit mine, with an output of around 3m tpa, according to the USGS. The other producer is Causmag Ore Co., a subsidiary of Orind Australia Pty Ltd. 

Australia also has an operating rare earths mine - Mt Weld, in WA, operated by Lynas Corp. which ships its ore to Malaysia for processing.

Metals and mining companies under stress on ASX

The decline in Australia’s mining fortunes has also been felt on the Australian Securities Exchange (ASX). 

The number of ASX-listed metals and mining companies (excluding energy sector companies), which stood at 731 on 31 December 2013, had fallen to 718 as of 30 September this year.

James Posnett, listings and business development manager at the ASX, told IM that the exchange has seen eight mining initial public offerings (IPOs) between the start of the year and mid-November. "The rest of the difference was either de-listings or backdoor listings - we had 19 backdoor listings, many of which were mining companies changing into tech companies," he said.

"The overall IPO market is very strong, but challenging for mining stocks, reflecting where we are in the resources cycle," he added.

Posnett explained that even though mining cash raised through IPOs is weaker year-on-year, the amount of "follow-on capital" raised for the mining sector is up on 2014.

Number of listed companies by industry

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Source: ASX