As the mining services industry’s main activity is contract mining, the industry’s performance is highly dependent on trends in mining activity. Rising demand and high prices for minerals have led to a mining boom over the past five years, thus increasing demand for mining services. Industry revenue is expected to grow by an average 7.2% per annum over the five years through 2010-11.
Flooding in the major coal mining areas of Queensland in early 2011 reduced mining activity in the second half of 2010-11. However, the industry is still forecast to generate revenue of $8.2 billion for the year, an increase of 7.0% on 2009-10. The industry accounts for 0.3% of total GDP and is expected to generate net profit before tax of almost $1.1 billion in 2010-11.
The industry does not export and does not face import competition, as all services relate to the domestic mining industries. As a result, domestic demand is equivalent to industry revenue. About 17,500 people are employed by the industry, which is expected to pay wages totalling $1.8 billion in 2010-11. The industry consists of 110 establishments and 90 enterprises.
The conditions faced by firms in the industry are expected to improve over the next five years, as world growth firms and demand for minerals revives. However, competition for work will be intense. Industry revenue is anticipated to average annual growth of 6.0% over the next five years, to total $11.0 billion in 2015-16.
The industry is expected to continue to perform strongly over the next five years. Firming global growth will underpin rising demand for a range of minerals, providing the basis for growth in mining services. Particularly strong growth in iron ore production is anticipated, fuelling demand for contract mining in Western Australia. Rebounding coal production in Queensland after the floods of 2010-11, combined with expansion in coal output capacity in both Queensland and New South Wales, will fuel contract mining activity in the eastern states. In contrast, some other areas of metallic mineral mining and non-metallic mineral mining are expected to expand more slowly.
Gold mining provided a strong impetus to the early growth of contract mining, and is expected to provide steady, ongoing work rather than large new projects in the next five years. New contracts in the Gold Ore Mining industry will replace those that will expire due to reserve depletion or the reserve becoming uneconomic to mine. A move towards underground work is expected to continue, as the more easily mined (by open-cut methods) gold reserves are depleted. An increase in the gold price has led to renewed interest in the metal and this is expected to translate into improved contract mining opportunities. The mining of other metallic minerals will provide some opportunities, though mine owners will focus closely on the cost of mining contractors as opposed to in-house operations.
Overall, the conditions faced by contract miners are expected to be favourable. Ongoing growth in demand for minerals from China will underpin continued development of mineral resources and provide opportunities for contract miners to expand their operations. Activity overseas is expected to provide a key growth area for the industry. Some firms already undertake contract mining work overseas, notably Leighton Holdings and Downer EDI. This trend is expected to strengthen during the next five years.
Industry rationalisation is expected to continue, as small and medium firms look for synergies and as large firms continue acquiring smaller operators. The scale of many contract mining operations will make it increasingly difficult for small firms to compete effectively. There is also likely to be a trend towards undertaking large projects on a joint basis. However, mergers among the largest operators in the industry are not anticipated. Industry revenue is forecast to increase by an average 6.0% per annum over the next five years, to reach $11.0 billion in 2015-16. However, industry profit is expected to expand more strongly as firms seek economies of scale and strengthen cost controls.
The Federal Government has announced that it will introduce a new resource rent tax on mining profits called the Mineral Resource Rent Tax (MRRT) from July 1, 2012. The MRRT will be applied to iron ore and coal projects at the rate of 30% after allowing for extraction costs, the recouping of capital investment and a return on capital equivalent to the long-term government bond rate plus 7.0%. The MRRT will apply to mineral production, and onshore oil and gas production from all current and future projects. Mining companies reacted to the announcement of the Resource Super Profits Tax (the original scheme) by declaring that it would drive mineral investment offshore. Some believe the same to be true for the MRRT. If MRRT eventuates, growth opportunities for firms in the industry may be reduced.
Barriers to entry in this industry are high and are steady.
Barriers into the industry are considerable. In particular, a large amount of capital is required to establish an operation. Firms need to invest heavily in large-scale equipment. Work also tends to be won by firms offering not only a competitive price, but also with an established track record. The industry has substantial working capital requirements. Firms need to be able to fund activity until progress payments are made. In some cases (mainly mine development), firms may be required to lodge a bond with their customer. Firms also need to be globally competitive because mining is dominated by large multinational operators accustomed to dealing with a range of service providers across the globe.
Robert Bryant is the general manager of business information firm IBISWorld.
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