The Australian mining division occupies an important place in the nation’s economy. Although it is one of the smaller divisions, it is the most important exporter.
The mining division is expected to generate revenue of about $208.9 billion in 2011-12, up from $138.8 billion in 2006-07, yielding average annual growth of 8.5%. Revenue is expected to grow by 12.0% in 2011-12, having already expanded by 20.0% in the previous year as the division rebounded from the global financial crisis. The mining division is expected to generate about 8.2% of Australia’s GDP in 2011-12. Its 2,500 firms employ 132,464 people, paying about $16.78 billion in wages in 2011-12 and the division’s net profit is expected to be $77.44 billion.
The mining division is heavily export oriented, with about $161.1 billion of output, or 77.1% by value, exported with only minimal processing. Most of the remaining output is processed locally by the metal products manufacturing industries, and is used to generate electricity and provide gas supply. Imports supply about 35.6% of the domestic demand for mineral products and consist mainly of crude oil.
Trends in the mining division are played at a global level, and high and rising prices for a range of commodities over 2003 to 2007 encouraged resource development worldwide. The resulting increases in global capacity became available just as the global financial crisis slashed global growth and pushed many developed countries into recession. In this climate, commodity prices fell sharply in the second half of 2008 and early 2009, before recovering strongly as demand rebounded. In addition, oil prices jumped sharply in 2010-11 in response to political turmoil in a number of producing countries, and are expected to continue rising in 2011-12.
Rising production volumes worldwide for a range of mineral commodities are expected to see prices flatten and, in some cases, soften over the next few years. This price trend, combined with strongly rising output from Australia, support average annual growth in divisional revenue of about 4.7% in the five years through to 2016-17. By that time, industry revenue is expected to be $262.9 billion. Industry profit is expected to grow a little more strongly than revenue, as firms reap productivity gains from growing economies of scale. The profit gains are expected despite the imposition of a Mineral Resource Rent Tax on coal and iron ore, the extension of the existing Petroleum Resource Rent to onshore oil production and output from the North West Shelf project (replacing royalties in both cases) and the introduction of carbon pricing.
The major factor affecting the performance of the Mining division will continue to be the pace of world economic growth, the competitiveness of Australian producers and the value of the Australian dollar.
The demand for a range of metal and energy products is heavily dependent on trends in world economic growth. Slower growth ultimately both reduces the rate at which the demand for minerals expands and holds down mineral prices.
Most of the minerals that Australia producers export to markets in the Asia-Pacific region find their way into manufactured goods (metals and a range of other products) destined for other markets, including the developed economies of the European Union, Japan and the United States. As a result, performance is not only sensitive to economic growth in local markets, but also to world economic growth.
Minerals are traded on global markets. The generally undifferentiated nature of the products and the large number of producers worldwide (in most markets) mean that suppliers are price takers — they cannot directly influence market prices to any great extent. This situation prevails even in oil markets, where the OPEC cartel seeks to influence prices. Typically, it can only do so for relatively short periods, since non-OPEC producers react to price signals, and supply and demand imbalances. However, a protracted period of low oil prices, as in the 1990s, leads to cuts in exploration spending and hence can hamper the ability of producers to respond to price signals, especially if demand is growing strongly at the same time.
In markets such as these, the most efficient producers reap the greatest gains during periods of high prices and high demand and are best placed to weather periods of low prices and weak demand. The supply of most minerals is relatively price elastic, which means that relatively small rises in price tend to result in proportionally larger increases in supply. Most Australian mining companies operate low down on the cost curve, indicating that they are both globally competitive and well placed to prosper in such a market.
Most minerals prices are expressed in US dollars (both in contracts and on the spot market), making Mining division revenue and profit sensitive to swings in the exchange rate.
The performance of the mining division surged during most of the five years through 2011-12, riding on the back of sharply higher prices and increased output. The gains made were partly eroded in 2009-10 as the global financial crisis and its adverse effect on economies worldwide curtailed the demand for minerals, leading to price falls. While economic conditions are expected to improve during the next five years, initially the gains for mineral producers will be small, reflecting the subdued effect of sluggish global growth on demand.
Miners are expected to experience highly favourable demand conditions over the next five years. In particular, stronger growth in developing countries such as China and India will continue to boost their demand for Australian mineral exports. Coal and iron ore producers will be the key beneficiaries of China’s rapidly growing demand for minerals, leading to large increases in output and exports. All the growth in Australia’s iron ore production over 2006-07 through to 2011-12 was absorbed by China’s expanding steel mills. A similar performance is expected over the coming five years.
The prices of most mineral commodities are expressed in US dollars. US dollar prices for many metallic minerals plunged in the second half of 2008 and continued to fall in 2009 before regaining ground in the first half of 2010 and have continued to rise since. More moderate prices are expected over subsequent years, as the latest wave of unrest in the Middle East subsides and as recent investment in mines (both in Australia and overseas) translates into additional volumes of mineral production. As restarted, new and expanded operations come on stream worldwide, the supply and demand balance for minerals is expected to move more closely into line, putting a lid on prices.
Australian mineral producers are expected to see a slight reduction in the value of the Australian dollar over the next five years, reflecting firming global growth and in particular, improved conditions in Europe and the United States. The anticipated easing of the value of the Australian dollar (compared with 2011-12) will be slightly positive on Mining division revenue.
Overall, the mining division revenue is expected to expand at an average annual rate of about 4.7% over the next five years to reach $262.9 billion in 2016-17. Revenue growth will be slow, at 0.1% in 2012-13, rising strongly over the next two years. Net profit is expected to rise by a little less than revenue in the five years to 2016-17, as firms face costs pressures and new taxes.
The five years through 2015-16 are also expected to see continued consolidation. Although plans by BHP Billiton and Rio Tinto for a production alliance in the Pilbara have been abandoned due to regulatory and commercial concerns, small miners that commenced operation in the past five years are likely to be takeover targets in a climate of more subdued pricing. Large miners, such as Xstrata PLC, may also be absorbed by even larger stake-holder companies, such as the recently floated Glencore.
The Federal Government plans to impose a Mineral Resource Rent Tax (MRRT) on iron ore and coal production. Key elements comprise a threshold return beyond which the tax is imposed, set at the government long-term bond rate plus 7.0%; a tax rate of 30%; allowing existing projects to use market value in calculating profits for MRRT purposes; exemptions for small projects with resource profit of less than $50 million per year; allowing investment made after 1 July 2012 to be written off immediately for the purposes of the MRRT, rather than depreciated over a number of years; a deduction for royalties paid to state governments; and a 25% extraction allowance.
The extraction allowance reduces the effective MRRT rate to 22.5% and is intended to recognise the contribution of the miner’s know how to profit at the mine gate. The Federal Government also plans to extend the existing Petroleum Resource Rent Tax to all offshore and onshore oil and gas production, although that will be accompanied by an end to crude oil excise and rebates of royalties paid to state governments.
The Federal Government also plans to introduce a tax on greenhouse gas emissions on July 1, 2012, set at a starting rate of $23 per tonne of carbon dioxide equivalent (CO2-e) emitted. The carbon pricing arrangements will cover the stationary energy sector, industrial processes (including mineral processing and liquefied natural gas production), non-legacy waste, fugitive emissions (mainly from mining coal seams) and transport. In addition, fuel used for mining and quarrying will attract the carbon tax. Carbon pricing will be accompanied by various forms of industry assistance, directed at emissions-intensive, trade-exposed industries and by a package designed to assist coal mines with the highest levels of fugitive emissions.
Barriers to entry to the Mining division are high. In particular, large amounts of capital are required to establish a world-class and internationally competitive mine. As a result, activity tends to be dominated by large players who are able to compete globally to secure low-cost, high-grade mineral resources.
Long-term contracts between existing operators and buyers (both local and overseas) can also pose a substantial barrier to entry. However, the increasingly widespread availability of contract mining has lowered the capital requirements of new entrants.
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