Australia | Nov 24 2014
-Downturn in investment to persist
-Boom in maintenance, operations
-Mining output set to surge
By Eva Brocklehurst
Australia's miners are being challenged by low prices and weak growth in export demand coinciding with a downshifting of investment in mine construction. Over the next four years a 40% reduction in mining investment is forecast by industry analyst BIS Shrapnel.
The report, Mining in Australia 2014 to 2029, suggests mining investment, production, services and employment will diverge over the next five years. Mining investment peaked in 2013/14, and as it declines over the next four years production will surge by one third. The investment in coal, iron ore and other commodities had already fallen by 2013/14 but gas investment drove the peak. Completion of these big projects will mean investment will slump markedly from here.
The report found a mix of lower demand and relatively soft global economic growth, as well as increasing supply, has pressured prices. A mild anticipated acceleration in world economic growth and industrial production in the medium term is expected to support modest increases in most commodity prices in US dollar terms. Still, at this stage miners have responded by cutting costs and re-drawing mine plans in order to increase productivity. Those with take-or-pay contracts are hurting, particularly in thermal coal where the price has stayed too low for too long in BIS Shrapnel's view, and put some companies in the hands of receivers. On the flipside, the withdrawal of supply from the market enhances upside possibilities for coal prices, although the report's authors warn that hard choices on the viability of operations will need to be made.
BIS Shrapnel economist and report author Rubhen Jeya observes much publicised losses in employment and closures of mining operations are consequences of lower prices, a stubbornly high Australian dollar and weak export demand growth. Australia's major export commodities, coal and iron ore, have recorded multi-year lows in price and miners should expect weak conditions to continue over the next few years. Eventually, global efforts to reduce investment in response to weak prices should help create the conditions for new investment cycles.
A sustained downturn in mining investment will create headwinds for the Australian economy and BIS Shrapnel's Adrian Hart suggests, with public investment set to fall further, the economy is likely to remain weak over the next year. Still, the report signals it is not all bad news. A five-year boom in production operations and maintenance is set to roll. Mr Hart suggests that over the past three years, the real value of mining production has increased by 30% and this now makes up 10% of the national economy. In Western Australia, the value of mining production will overtake that of the entire Australian manufacturing sector during 2014/15.
Mining exploration fell by 13.8% in 2013/2014, characterised by falls across all major industries. Oil & gas and iron ore are the key Australian industries expected to keep exploration levels elevated. Fixed capital investment is forecast to decline to a trough of $55.1 billion in Australia in 2017/18, before recovering. To keep this in perspective, BIS Shrapnel notes his is around twice the annual level of investment compared with 10 years earlier. Contract mining services have felt the cost cutting measures most keenly, with services being brought back in house and activity curbed. Contract mining was worth $9.8 billion in 2013/14 and should recover to reach $11.8 billion by 2018/19. In terms of maintenance spending, this increased by 7.5% in 2013/14 compared with 2012/13 and total contract maintenance is expected to retain a 40% share of mining over the next five years.
The report forecasts mining output to grow to $219 billion by 2018/19, 33% above 2013/14 levels, supported by the completion and operation of the big LNG projects. The sector's share of Australian GDP will be lifted to 12%, making it Australia's second largest industry sector.
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