Despite volatile investment booms and busts, the mining sector continues to grow in Australia. Representing just 7% of the national economy in the mid 1980s, mining production comprised over 10% of the economy in 2014. By 2018, this share is expected to reach 12%, with the value of mining production from Western Australia alone expected to exceed the value added by Australia’s entire manufacturing sector in 2015. Welcome to the next phase of the mining boom.
We have all heard about the recent mining boom in Australia, but this innocuous catchphrase can mean different things to different people (and organisations). In this respect, it helps to consider these three alternative meanings:
1. The boom in mining commodity prices, which occurred between 2002 and 2012
2. The boom in mining investment, which occurred between 2004 and 2014
3. The boom in mining production, which really took off in 2007 and continues today
When most people (including economists) speak of the mining boom, they are usually referring to investment, which is – and always has been – highly cyclical. Mining investment in Australia reached a record $93.1 billion in 2013/14 (all figures shown are in constant 2011/12 prices). That’s over nine times the level of investment just 10 years prior. Growth in investment has been primarily underpinned by major LNG, iron ore and coal projects. But based on the development pipeline, 2013/14 is likely to be the peak in the current mining investment cycle. (By the way, that mining investment is still peaking at all may come as a surprise to most people involved in the mining industry who have already been through two years of savage cuts in investment, but not to those who are still working on the massive phase of LNG development still taking place across Western Australia, Queensland and the Northern Territory.)
So how did this happen? Essentially, it was unprecedented (and somewhat unexpected and unplanned for) growth in global demand for resources, driven by the growth of China—now the world’s largest economy based on PPP measures. While China is, in most cases, the largest producer of commodities, its strong metals-intensive growth through the 1990s and 2000s outpaced even its own capacity to supply. Excessive Chinese demand spilled over into trade demand, in turn causing a significant upside shock to global prices, as supply could not keep up with demand (refer to commodity prices chart below). Prices skyrocketed, and investment soon followed.
But we were unprepared for the scale of investment required, and the long lead times required to build capacity and eliminate supply bottlenecks along our ports and rail systems. In turn, these delays fed the commodity price boom and stimulated an even greater investment response. Stronger investment around the world eventually led to growth in supply which, in conjunction with an easing in Chinese economic growth, has allowed commodity prices to fall back, although they still remain at historically high levels. Note that LNG prices are linked to the price of oil for Australia’s major LNG export partners (mainly Japan and China).
Commodity prices of Australia’s major resource sectors
Australia’s oil and gas sector has grown considerably over the past decade. Oil and gas investment reached $64.6 billion in 2013/14, around 20 times the size of investment in 2003/04. The sector has been dominated by just a handful of major projects. While the scale of investment has been large, the industry has suffered from severe cost escalation and delays in construction, which has made alternative LNG projects more attractive (such as offshore floating LNG platforms).
In the iron ore sector, investment has increased significantly over the last ten years, reaching a peak of $20.7 billion in 2012/13. The major players BHP Billiton, Rio Tinto and Fortescue Metals Group have invested heavily in their Pilbara (Western Australia) operations—extending from mine to port. More recently, cost escalations, funding constraints and declining iron ore prices have forced some of the larger players to scale back investment, adopt cost cutting measures and improve the productivity of existing mines. As a result, in 2013/14, investment fell by 25%.
In the coal sector, prices have declined significantly since the peak in 2011. Falling coal prices and increasing operating costs has resulted in a number of high cost mines shutting down. Some major projects have also delayed as they are no longer feasible. Coal investment peaked in 2012/13 at $11.8 billion, but has since declined by 22%.
Investment by major sector, between 2010 and 2014
But while investment has peaked, the production boom phase rolls on. Production continues to increase strongly in iron ore, and to a lesser degree, coal—which has been affected by the closure of high cost mines. Similarly, we can expect that as the bulk of major LNG projects reached completion over the next few years, there will be a new “echo” boom in LNG production (as well as maintenance). This will be a key driver sustaining the boom in mining production overall.
Mining Production by major sector, between 2010 and 2014
So how big is Australia’s mining sector, and where is it likely to go from here? On a purely mining production basis, mining now makes up around 10% of the national economy. In Western Australia alone, it makes up 40% of the state economy and is roughly equal in size to the value added by Australia’s entire manufacturing sector – which it will overtake during 2015. But given its impact on investment and employment (both in the construction, production and maintenance phases) we estimate that the ‘true’ share of the mining industry is closer to 20% of the economy.
But the mining sector is quickly changing, presenting a number of risks and opportunities. In our recently released outlook report on the mining sector, Mining in Australia 2014 to 2029, we discuss the global demand for resources, and forecast commodity prices, investment, exploration, production, maintenance and the implications for contractors over the next five to fifteen years. Overall, contractors and suppliers to the mining industry should note that the end of the current boom in mining investment still presents opportunities in other parts of the mining boom which are still unfolding: operations, production and maintenance. And, eventually, global efforts to slash investment in response to currently weak prices will itself help create the price conditions for new investment cycles in future. The challenge is to make the right strategic choices today to take advantage of the opportunities as they come along, commodity by commodity, region by region, in what will remain a highly cyclical industry.