STRONG GROWTH FOR MINING AHEAD – without Adani Coal
Activity in Australia’s mining sector is set to accelerate through 2017/18, auguring well for exports and the broader economy, according to a new report from leading independent economic forecaster and industry analyst, BIS Oxford Economics.
According to the company’s Mining in Australia 2017 to 2032 report, mining exploration, production, and maintenance are all expected to lift significantly through 2018. It will track even higher in subsequent years as strengthening global economic growth supports commodity prices and underwrites new investment and mining operations expenditure.
Mining production only grew 2.5 per cent in 2016/17 according to ABS National Accounts data, but BIS Oxford Economics expects growth to accelerate to 5.5 per cent in 2017/18, with even stronger growth over the remainder of the decade.
“The enormous investment boom is now translating into production, particularly within oil and gas, where Australia is expected to become the leading LNG exporter by 2022,” said Rubhen Jeya, BIS Oxford Economics Economist and report author. “Growth in mining production will be roughly double the pace of the national economy over the next five years.”
According to BIS Oxford Economics, the completion of a $200 billion wave of LNG projects over the coming year will see aggregate mining investment decline further over the next two years. However, this masks the start of a new cycle of investment across a range of commodities including copper, gold, coal and iron ore.
“The completion of the Wheatstone, Ichthys and Prelude projects will subtract a further $20 billion in mining investment over the next two years,” said Adrian Hart, Associate Director of Construction, Maintenance and Mining at BIS Oxford Economics. “But excluding oil and gas, mining investment elsewhere is expected to grow at a double-digit pace over 2017/18 and 2018/19 – and will also continue to grow robustly through the subsequent three years.
“Considering that most LNG investment from here represents imports in any case, the time has come to stop blaming the mining investment bust as the reason behind sluggish Australian economic growth.”
Forecast strong, even with Adani Carmichael coal “unlikely to proceed”
This stronger outlook for resources investment does not include Adani’s $16 billion Carmichael coal project (including associated rail infrastructure) in the Galilee Basin, which BIS Oxford Economics do not include in its base case scenario for the next five years.
“Given longer term steaming coal price projections, relatively high development costs, and risks to finance, this project is unlikely to proceed,” said Hart. “But there are other coal projects which have re-opened or been put back into development because of stronger coal prices compared to the trough in early 2016. The outlook for coal remains positive, although prices may slip back a little in 2018.
“If the Adani coal project did eventuate, there would be significant upside to Queensland’s coal production forecasts, but not until the 2020s. In the meantime, such a large investment would likely erode confidence to invest in coal elsewhere, with negative implications for investment and production in the Hunter region, traditionally Australia’s largest thermal coal exporter.”
Higher prices for most commodities over the past year have already seen a turnaround in exploration activity, which is forecast to rise 8.7 per cent in 2017/18 – and nearly 40 per cent over the next five years.
The strong turnaround in prices has subsequently boosted miners’ profitability, with maintenance activity to be the biggest winner according to the report.
“Maintenance has taken the brunt of cost cutting efforts in recent years,” said Jeya. “With higher utilisation across a much larger post-boom asset base, we expect maintenance activity to rise nearly 60 per cent in real terms over the next five years, offering crucial opportunities for contractors. But it really is a very different story by commodity and region around Australia in this space.”
Even so, there are challenges for both miners and contractors as they adjust to global and domestic developments.
“How the global economy performs remains key,” said Hart. “While there are a range of risk factors looking ahead – particularly regarding the US, China, UK and Eurozone economies – global economic growth continues to reaccelerate and is expected to remain robust over the next few years. This is expected to support commodities demand and prices, particularly in the Asian region.”
“Domestically, we expect challenges through the next few years as higher levels of mining investment compete with a range of large infrastructure investment projects. Together with rising commodity prices, this is likely to bring about higher construction and development costs for projects which miners, contractors and governments should be alert to.”
Key findings of the outlook from the BIS Oxford Economics Mining in Australia 2017-2032 report (dollar values quoted in 2015/16 prices):
Commodity Prices: In US dollar terms, the prices for several key commodities edged higher, driven by supply side concerns and policy changes in China. As excess supply in several commodities is absorbed by rising demand, prices are expected to strengthen, particularly in the second half of the outlook period. Fairly robust growth in the Chinese economy (although with slowing growth rates) and a strong Indian economy are the key regional drivers that will sustain growth in Australia’s mineral exports and buoy prices.
Exploration: Commodity prices are the key driver and predictor of exploration activity. During the commodity price boom, exploration activity reached a peak of $7.7 billion in 2012/13. However, as commodity prices plunged, the level of exploration activity fell by around two-thirds to $2.9 billion in 2016/17. This is the lowest level in 10 years but remains relatively strong by historical standards. BIS Oxford Economics forecasts exploration activity to climb back towards $4 billion within the next five years.
Fixed Capital Investment: Investment boom peaked at $95.9 billion in 2012/13 but has fallen to $46.4 billion by 2016/17. The collapse in aggregate mining investment has two more years to run before any pickup with contraction in oil and gas segment becomes the primary driver. We expect mining investment to bottom at $28.4 billion in 2018/19, driven by declines in oil and gas extraction as large LNG projects are completed without projects of a similar size in the pipeline. By 2021/22, investment is forecast to climb back to $38.4 billion.
Production: Rising mine production has partly offset the negative economic impact of the investment bust. Over the next five years, mining production is forecast to rise 28 per cent in Gross Value Added (GVA) terms (about five per cent year-on-year) or around double that of the broader economy driven by growth in the oil and gas segment.
Contract Mining: Benefits of contract mining are generally superseded by the need to conserve costs at times of weaker commodity prices as had occurred in the past few years. The recent weaker price environment contributed to a slump in the value of contract mining which fell to $10.8 billion in 2015/16 as producers responded by closing more expensive operations and bringing some operations back in-house. In 2016/17, the value of contract mining increased and is set to experience stronger growth in the short term before recording slower growth to reach $12.8 billion in 2022.
Maintenance: Mining maintenance totalled an estimated $7.1 billion in 2016/17. Of the sub sectors, it is estimated that coal mining contributed the largest portion ($2.7 billion) followed by metal ore mining ($2.2 billion), oil and gas extraction ($1.4 billion) and other mining ($800 million). Higher prices, a maintenance backlog, and strong growth in the capital stock in oil and gas is expected to drive a boom in mining maintenance spending, with total maintenance forecast to surge towards $12 billion per annum by 2021/22.