Western Australia is propping up the country’s mining industry
Michael Schwartz examines how Western Australia is a key driver behind Australia’s mining success and the role it can play in responding to the challenges facing the country as a whole.
In 1890, the augustly named Colliery Guardian periodical (established 1858) informed its equally august British mine-owner readership that a diamond drill in Australia had reached a coal seam 50 yards thick. It is fair to say that Australia had ‘arrived’ as a key coal mining area. Coal, coupled with other minerals – not to mention the vineyards and the sheep above ground – has more than played its part in building ‘The Lucky Country’, as Australians call their native land.
Australia is now the world's largest coal exporter and second-largest gold producer. The US Geological Survey noted estimates of 2% more gold produced in 2014 over 2013. This increased production kept Australia in second position behind China, although the latter's increase was large enough to propel it even further in front of Australia. Western Australia (WA) has always played a significant role in the country’s mining industry, and it seems likely it will continue to do so.
WA’s Department of Mines and Petroleum estimates that Australia’s minerals and energy output for 2014 approached AUS$167bln, of which almost AUS$100bln emanated from WA. This latter broke down in turn into iron ore (nearly AUS$54bln), petroleum (AUS$24bln), and gold (AUS$9bln), as well as several others.
The crucial part played by WA is obvious. It is borne out by the percentages for individual minerals contributed by WA to Australia as a whole – 71% of total crude oil is from WA, natural gas 63%, exploration 58%, and private new capital investment in minerals and energy 60%.
Is it all clear sailing?
One question currently dominating global mining is China’s slowdown in industrial production and its consequent decline in raw material imports.
Bank of China Hong Kong’s Economic Newsletter noted in late September 2015, ‘Industrial production, one of the indicators most clearly correlated with overall economic activity, rose only 6.1% in August. Sub-7% growth appears to have become the norm. So long as severe over-capacity remains a dark cloud hanging over the manufacturing sector, industrial production will be very unlikely to stage a strong rebound.’
This comment is gentle compared with the view in July 2015 of UK-based analyst BMI’s Australia Mining Report. ‘Australia's mining sector is set to suffer the painful spillover effects of a prolonged period of weak mineral prices, in part resulting from a sharp investment slowdown in China. Australia has been among the biggest beneficiaries of the China-led commodities boom over the past decade, attracting huge amounts of investment into the minerals space.
‘Driven by China's voracious appetite for key commodities such as coal and iron ore, the value of Australia's mining industry had increased by more than six-fold from US$24bln in 2003 to US$154bln in 2013. As a result, this has seen the sector's share of GDP rising from 4.5% to 10.2% over the same period.
‘However, the boom years in the mining industry are over. With China's economy on course for a continued slowdown over the coming years and mineral prices set to remain low, Australia's mining sector will suffer the painful spillover effects.’
In fact, BMI is almost merciless in its predictions for Australia, stating, ‘We believe Australia will be the biggest loser from the mineral imports shift in China. The latter commands a prominent role in Australia's exports of key commodities including coal and iron ore. Already, the mining sector is feeling the crunch of plummeting commodity prices as a string of miners scale back their ambitions and slam the brakes on investment.
‘The rising tide of economic nationalism, declining labour productivity and aggressive minimum wage legislation will compound the challenges in the mining industry, amplifying the downshift in Australia's economy going forward. We expect the value of Australia's mining sector to reach US$191.9bln by 2019, growing at an annual average rate of 3.6% over our forecast period. This contrasts with an average growth rate of 21.5% per annum over the past decade.’
A more positive view
WA’s mining industry naturally disagrees. Materials World asked one of the most senior representatives in this major mining state for his opinions on WA mining and its challenges and opportunities.
Richard Sellers, Director-General of Western Australia’s Department of Mines and Petroleum (DMP), replied, ‘The DMP does not keep specific figures on Chinese demand for minerals. However, the falls in the prices of most commodities seen over the past 18 months have most likely been driven by a fall in Chinese demand for minerals.
‘Even though demand appears to be falling, WA producers are able to sell all minerals produced and continue to enjoy strong market share for commodities, particularly iron ore. Production volumes were up in most major commodities (except nickel and gold) in 2014-15 compared to 2013-14. The main impact on the WA mining sector is due to the falls in commodity prices.’
Sellers confirmed that the value of WA’s mineral and petroleum industry was down 19% to US$99.5bln in 2014–15, mainly due to the fall in commodity prices. Mining employment also decreased to an average of 105,922 persons during 2014–15, a fall of 3% from an average of 108,975 in 2013–14, as companies strived to reduce costs of production. Weaker commodity prices also resulted in continued falls in mineral exploration expenditure in 2014-15, which fell to US$1.58bln or by 24% year-on-year, and in petroleum exploration expenditure, which fell by 31% to US$2.1bln. Capital,
in turn, has been harder to raise.
Sellers identifies several areas where WA might make up for the problems already outlined. ‘The recent signing of Free Trade Agreements by the Australian Government with China (ChAFTA), Japan (JAEPA), and Korea (KAFTA), and the Trans-Pacific Partnership Agreement, can open significant export opportunities for WA’s resources sector. For example, under ChAFTA, 99.9% of China's imports of resources, energy and manufacturing products from Australia will enter duty-free.’ This includes the elimination of some 15 different Chinese tariffs and duty-free entry into Japan for Australian energy, coke, and metals.
WA itself provides financial relief for vulnerable resource areas, including the temporary iron ore royalty assistance programme, price relief at Port Hedland’s Utah Point Bulk Handling Facility, and local government rates relief. In addition, the Exploration Incentive Scheme has been extended to 2017, by which time it will have provided AUS$130 million of support.
The social issues
WA’s mining industry is very conscious of the need for Corporate Social Responsibility (CSR) – it is on its way to operating the country’s first aboriginally-owned iron ore mine.
A commercial agreement signed between Fortescue Metals Group Ltd (FMG) and Australian Aboriginal Mining Corporation Pty Ltd (AAMC) in Perth September 2015 means that FMG will provide AAMC with access to its infrastructure – AAMC will consequently be able to deliver up to 2Mt/y from its existing projects to FMG's port or rail facilities for a five-year period.
The amount of ore that can be delivered to the rail facilities will be determined by FMG taking into account factors such as prevailing rail volume and potential for surplus capacity. In addition, FMG may either purchase ore directly from AAMC or act as AAMC’s agent.
Fergus Campbell, executive director of AAMC, spoke to Materials World about the many factors that will combine to make the new venture a success. He identified as essential, ‘a mature and supportive Pilbara iron ore industry that understands that there will be mining in the Pilbara for potentially centuries to come and that it must continue to work hard at improving outcomes for all of its stakeholders and, most importantly, the traditional land owners groups on which mining projects sit.’
In addition, there must be ‘a company like AAMC that seeks to engage with Aboriginal businesses because it understands that this improves its chances of securing support from within the industry, access to infrastructure and commercial success.’ This, in turn, must be supported by ‘infrastructure-owning companies that support the long-term advancement
of Aboriginal stakeholders and community groups.’
Australia faces severe challenges from China’s industrial slow-down. However, the country remains dominant in many fields, such as gold, while free-trade agreements can help compensate for losses in China and provide benefits to its mining industry as a whole.