Multi-billion dollar industries: Part V

SmartCompany’s Developing an Entrepreneurial Australia Roundtable came up with 10 multi-billion dollar industries of the future. JAMES THOMSON talks to IBISWorld’s general manager Rob Bryant about the next two sectors that will take off: Mining and Biotec

As part of SmartCompany’s Developing an Entrepreneurial Australia Roundtable, we asked IBISWorld general manager Rob Bryant to nominate the 10 multi-billion dollar industries of the future.

We then asked our panel of 17 entrepreneurs and experts to try and identify the niches within these sectors that Australian businesses can exploit.

In the final part of our five-part series, James Thomson looks at two more of the 10 big industries of the future – mining and biotechnology.

If you are already operating in one of the two sectors next nominated as multi-billion dollar industries of the future, we’d love to hear from you about the opportunities and barriers that exist. Send your feedback here.

To see the first eight of our 10 billion-dollar sectors, see part one, part two, part three and part four of our five part series. Each article features two sectors.

9. Mining

Given the focus on Australia’s booming resources sector, it’s not exactly a surprise to find that mining will continue to be one of Australia’s multi billion dollar industries in the next 10 years.

Key statistics, 2007

Products and service segmentation

Major market segments

Industry outlook

IBISWorld forecasts that this industry will grow at an average rate of 2.7% a year over the five year period to 2012-13 as production continues to expanding to meet demand from rapidly growing markets such as China and India.

While the outlook for some metals is mixed, coal and iron ore producers – led in Australia by big companies such as BHP Billiton, Rio Tinto and Fortescue Metals – will be among the main beneficiaries of China’s rapidly growing demand for steel as the urbanisation of the country continues. Indeed, earlier this year, the prices paid by Chinese steel makers for coal and iron ore doubled.

Of course, it’s not exactly easy for a small or medium-sized business to become a coal or iron ore producer. But that doesn’t mean there isn’t any chances to get a slice of the resource pie. Most big mining companies outsource vast chunks of their operations to other companies – some even have contractors doing the actual digging.

SmartCompany bloggists Colin Benjamin and Doron Ben-Meir came up with a number of areas where smart entrepreneurs can enter the industry, including engineering, mine design, safety, maintenance, human resources, equipment supply, transport, environmental services and services attached to infrastructure.

Key sensitivities

IBISWorld also nominates a number of factors that will affect the performance of the mining sector. These include:

• 10-year bond rate. Interest rates are important given the highly capital intensive nature of the industry.
• Downstream demand – manufacturing. The performance of the manufacturing industry has an important influence on domestic demand for mining output.
• Downstream demand – metal product manufacturing. The performance of the metal products manufacturing industry plays a particularly important role in influencing the domestic demand levels for the output of the mining industry. In turn, the basic metals industries are themselves heavily reliant on both growth and metals demand from overseas, given that the bulk of their output is exported.
• Exchange rates – Trade Weighted Index. The prices of most mineral commodities are expressed in US dollars. The value of the $US/$A exchange rate therefore plays an important role in determining the Australian dollar revenue earned by local producers. A weaker Australian dollar favours producers.
• GDP growth – east Asia. The economic performance of major trading partners, particularly Japan and other markets in the Asia Pacific region, is of fundamental importance to the Australian mining industry due to its heavy reliance on exports.
• Legislative compliance requirements – mining. Government regulation, particularly royalty payments and to a lesser extent the impact of the Mabo legislation, influence the industry’s operating environment.
• World price – energy, thermal coal. Energy and metals prices are of key importance to the mining industry. The effect on revenue of dramatic falls in key commodity prices during the late 1990s (in the wake of declining demand and industry over-supply) followed by the recent boom in prices illustrate the importance of commodity prices.

10. Biotechnology

Australia’s biotechnology sector has been touted as having the potential to become a multi-billion industry for some decades now, but has been something of a disappointment for the business community – Australia is yet to produce a world-leading biotechnology company.

Still, it is worth pointing out that as with mining companies – which can take decades to bring a project from discovery to profit – biotechnology companies need time, and funding, to reach their goals. Too often, short-sighted investors are unwilling to provide either.

The sector was represented at SmartCompany’s Roundtable by Richard Treagus, chief executive of Australian biotechnology company Acrux. His company has developed a technology that allows pharmaceuticals to be taken through the skin, applied as a spray or a liquid.

Its first product, a menopause drug called EvaMist, hit the shelves in the US in April. Acrux, which was established in 1998, is yet to become profitable (its loss narrowed from $3.5 million to $1.5 million in the first half of 2007-08) but its product pipeline and revenue is growing strongly.

Treagus said that biotechnology needs long-term support from investors if it is to thrive. Doron Ben-Meir suggested front and back-end incentives should be put in place to encourage venture capitalists and particularly Australia’s booming superannuation funds to pump cash into the sector.

Key statistics 2007

Products and service segmentation

Major market segments

Industry outlook

IBISWorld forecasts the biotech sector will grow at an average annual rate of 5.2% over the five year period to 2012-13, although it cautions that there are some uncertainties about future growth. Specifically, it is difficult to determine the extent to which drugs currently in development will progress to the market and be successful. Industry revenue growth will slow each year until 2010-11, before strong growth returns over the remaining two years of the forecast period.

The Australian biotechnology has been focusing on the areas of human health and agriculture. Both these areas are the focus of the National Biotechnology Strategy, and are expected to continue showing positive growth in the outlook period. The industry is expected to put an increasing emphasis on agriculture, climate change and water scarcity in the coming years.

Key sensitivities

IBISWorld also nominates a number of factors that will affect the performance of the biotechnology sector. These include:

• Age group (55+). An ageing population is creating demand for more life enhancing and life extending drugs, which are developed by this industry.
• Real GDP growth. The industry is extremely reliant on sound investor confidence, which is bolstered by a strong economy. Strong confidence in sharemarket returns, along with the potential of the biotechnology industry to bring products to market, will increase the availability of speculative capital used to fund start ups and more established companies (that may be close to product commercialisation). Investor confidence also ensures that capital remains with a company over the long term (as products can take a decade or two to come to market).
• Research and development expenditure. The Federal Government provides grants and funding to biotech companies, as well as funding government research facilities such as CSIRO. Changes in the structure of government funding have been blamed for slower industry growth in recent years.
• Sharemarket – All Ordinaries Index. A healthy sharemarket assists biotechnology companies in raising capital.