Maintaining Australia's advantage: mining advantage policy paper

56 Pages·2014·1.27 MB·English

by  Tamara Wheatley

This report can be found at www.acola.org.au © Australian Council of Learned Academies
www.pwc.com.au
Maintaining
Australia’s
mining
advantage
Policy paper
TheAustralianCouncil
ofLearnedAcademies
July2014
This report can be found at www.acola.org.au © Australian Council of Learned Academies
Contents
1 Introduction 1
2 Australia’sminingsector 2
3 Comparativeadvantages&disadvantages 8
4 Lookingtothefuture 16
5 Keyfindings 25
6 PolicySolutions 31
AppendixA CurrentissuesforAustralianmining 47
AppendixB Sources 52
i Miningpolicypaper:
MaintainingAustralia’sminingcomparativeadvantages
This report can be found at www.acola.org.au © Australian Council of Learned Academies
1 Introduction
1.1 Overview
PricewaterhouseCoopers(PwC)hasbeenengagedbyTheAustralianCouncilofLearned
Academies(ACOLA)tocompilearesearchreportonAustralia’sminingsector.Specifically,
thisreportexaminesAustralia’scomparativeadvantageinminingthroughunderstanding
thecurrentminingsectoranditschallenges,sourcesofcomparativeadvantage,andcredible
viewsofpossiblefuturesandforecastsforthesector.
Requirementsforthesectortomaintainitscomparativeadvantageandaddressthe
challengesareaddressedandalternativestrategiesforAustraliainthefutureareidentified
anddiscussed.
1 Miningpolicypaper:
MaintainingAustralia’sminingcomparativeadvantages
This report can be found at www.acola.org.au © Australian Council of Learned Academies
2 Australia’s mining sector
Forthepurposesofthisreport,miningisconsideredtobetheaction,process,orindustryof
extractingoresandothermaterialsfrommines.Insomeinstances,thefirststageof
processing,knownasprimaryprocessing,isincluded.Examplesofprimaryprocessinginclude
therefiningandtransformationoforestobasicformssuchasmetals.
Thefocusofthissectionismainlyonores.However,whenappropriate,theanalysisalso
includesthebroaderindustrysuchasprocessing,andassociatedindustriessuchasservices,
infrastructure,andmanufacturingofwhichsupporttheminingindustry.Abrieflookisalso
providedonthegasindustryduetotheabundanceofgasinAustralia,highlevelsof
investment,andthegrowthofgasusageinternationally.
Theinformationthatfollowsregardsthesize,growthandinvestmentoftheminingindustry
andananalysisofthecurrentissuesfacingtheindustry.Wherepossible,theinformationthat
isconsideredinthisreportisfromprimarysourcessuchastheAustralianBureauofStatistics
andcrediblesecondarysourcessuchasGeoscienceAustralia,Marketline,BureauofResources
andEnergyEconomics,IBISWorld,andBusinessMonitorInternational.Wenotethatin
somecasesthe‘sector’isdefineddifferentlydependingonthesource.
2.1 Size and growth
TheminingindustryislargeandcriticallyimportanttotheAustralianeconomy.Itisnotonly
largeintermsoforesextractedandmined,butisalsopartofalargervalueaddedindustry
whichincludesprocessing,andassociatedservices.
Informationisavailableonthefollowingsectors/industriesinAustralia:oreresourcesinthe
groundwhichareaccessibleformining,actualresourcesmined,miningaswellasmetal
production,thetotalminingindustryincludingextraction,processingandservices,minerals
exported,andthegasandoilextractionindustry. Table1attemptstosummarisesector
revenueandgrowthprojectionswithinthiscontext.
Table1:Australianminingsector–sizeandgrowth
SECTOR REVENUE GROWTHIN COMMENTS
2013 REVENUE
($b) (%perannum)
Miningextraction1 90.32 4.3From2012to Oremined.
2017
Miningextraction 121.94 11.0 From2011to Oremined,andproduction
andmetals 2016 ofmetalssuchas
production3 Aluminium,Iron,Steel.
Mineralsandore 130.0 Ironore$82.1billion,
exported5 metallurgicalcoal$23.7
billion,thermalcoal$17.2
billion.
Oilandgas 56.0 16.0From2013to 37%onthevolumeofgas
1GeoscienceAustralia(1,2)
286.6in2012
3Marketline(3)
498.9in2011
5 BureauofResourcesandEnergyEconomics(4)
2 Miningpolicypaper:
MaintainingAustralia’sminingcomparativeadvantages
This report can be found at www.acola.org.au © Australian Council of Learned Academies
Australia’sminingsector
extracted6 2018production producedisexported.
(supply);9.0for
industrysales
(demand)
Mining,andoiland 244.0 3.8From2013to Includesmining,oilandgas,
gas,including 2018 ironsmeltingandsteel
extraction, manufacturing;fossilfuel
production,and electricitygeneration,gas
services7 supply;electricity,gas,water
andwasteservices;
wholesaletradewhoprovide
accesstomachineryand
equipment;business
services;andintegrated
logistics.
ThefindingshighlightedinTable1suggestthatAustralia’sminingindustryislargelyan
‘explore,extractores,producemetalsandexport’sector,butwithasignificantsupporting
servicesector.
Australiaalsohasmajorglobalcompanieswhichoperateintheminingandgassector,having
fivecompaniesintheForbesGlobal2000list,withrevenueofabout$82billionperannum.
Thesefivecompaniesare:BHPBilliton,WoodsidePetroleum,Santos,FortescueMetals,and
NewcrestMining.
IdentifiedandexploitedmineralresourcesinAustralia
EconomicDemonstratedResources(EDR)arethoseknownresourcesinthegroundthatare
accessibleformining.ResearchsuggeststhatasatDecember2011,Australia’sEDRofa
numberofminerals(suchasironore)aretheworld’slargest.8
ThemineralsindustryisAustralia’slargestexportearnerwithmineralexportsaccountingfor
50%to60%oftheannualvalueoftotalexportsofgoodsandservices.Australia’sminerals
industryisdominatedbycoal,ironore,alumina/aluminium,copper,nickelandgold,with
principalmarketsinChina,Japan,SouthKoreaandIndia.Thevalueofthesectorisexpected
toreach$107billionby2017from$86.6billionin2012,growingatanannualaveragerateof
4.3%overthisforecastperiod.9
MiningandmetalsproductioninAustralia
Themetalsandminingindustryconsistsof:aluminium,ironandsteel,preciousmetalsand
minerals,coalandbasemetals.Further,thisincludesmining(extractionfromtheground)as
wellasproductionofmetalssuchasaluminium,leadandsteel.TheAustralianminingand
metalsindustryin2011was$98.9billion,withforecastsconductedin2011suggestingthatit
wouldreach$169.4billionin2016(11%perannumgrowth)withvolumeonlyincreasingby
about1%perannumoverthisperiod,from412.2mmtto436.5mmt.10Itisimportanttonote
however,thatthisrevenuegrowthforecastof11%perannumwasmadein2011when
commoditypriceswereincreasing.Consequently,oneneedstotakethisforecastgrowthwith
cautionascommoditypriceshavedecreasedsince2011(seeTable2).
6IBISWorld(5)
7IbisWorld(6)
8GeoscienceAustralia(1,2)
9BusinessMonitorInternational(7)
10Marketline(3)
3 Miningpolicypaper:
MaintainingAustralia’sminingcomparativeadvantages
This report can be found at www.acola.org.au © Australian Council of Learned Academies
Australia’sminingsector
Coalisthelargestsegmentaccountingfor52.3%oftheindustry’stotalvalue.Australia
accountsfor5.1%oftheAsia-PacificminingandmetalsvaluewithChinaat72.4%(Asia-
PacificalsoincludesJapan,SouthKorea,andNZamongstothers).
Miningindustryincludingextraction,processingandservices
Thescopeoftheminingindustryincludesalloperationsmainlyengagedintheextractionof
mineralsandhydrocarbons(oilandgas),explorationformineralsandhydrocarbonsandthe
provisionofavarietyofservicestofirmsengagedintheseactivities.Industriesinvolved
include:mining;ironsmeltingandsteelmanufacturing;fossilfuelelectricitygeneration,gas
supply;electricity,gas,waterandwasteservices;wholesaletradewhoprovideaccessto
machineryandequipment;businessservices;andintegratedlogistics.
Theindustryisexport-oriented,withexportsexpectedtoaccountforover65%ofrevenuein
2013.Thiscomparesto50%to60%growthinminerals,implyingahigherexportperformance
fordownstreamactivities.Performancedependsonglobaltrendsinsupplyanddemandfor
commodities.Revenuewas$244.4billionin2013andisexpectedtogrowatacompound
annualrateof3.8%overthenextfiveyears.11
GasextractioninAustralia
Australiaisendowedwithsignificantgasresourceswitharound3.8trillioncubicmetresofgas
EDR.However,theiruseinAustraliahashistoricallybeenovershadowedbycoal,especiallyin
thepowersector.Gashasgrowninimportanceoverthelastdecadewithgasnowrepresenting
themajorityofnewelectricitygenerationinvestment.Assuch,gasdemandgrowthhasbeen
fasterthanotherfossilfuels,andgasisnow21%ofAustralia’senergysupply.12
Australia’stotalgasproductionin2012/13wasestimatedtobe59billioncubicmetresof
whichLNGexportswerearound36%ofAustralia’sgasproduction.ExportsofLNGhave
increasedstronglyinrecentyears.Indeed,overthepastfiveyearsasnewLNGprojectshave
beencommissionedinresponsetogrowinginternationaldemandgrowthof8%%perannum
hasresulted.In2012,around79%ofAustralia’sLNGexportsweresoldtoJapanand16%to
China.13
Industryperformanceisexpectedtoimprovedramaticallyoverthenextfiveyearsfrom2013
inresponsetorisingproduction(especiallynaturalgas)andhigherpricesforoilandgas.
Increasedinvestmentintheindustrywillsupportrisingoutput.Industryproductionis
forecasttoexpandatacompoundannualrateof16.0%overthenextfiveyears,toreach$101
billionin2018from$56billionin2013.14Thisisduetoongoinginvestmentingasextraction
andnewsourcescomingonline.ThisincreasedproductionisduetodemandforLNG
increasingasanenergysourceinternationallyasacost-effectivealternativeasoilreserves
dwindleandbecomemoreexpensiveanddifficulttoaccess.Industrysalesrevenueisforecast
toincreaseby9%over2013onthebackofincreasednaturalgasoutputasmajorinvestments
comeonstream(forexample,Chevron’sGorgongasprojectin2015).
Australiaalsohasalongertermopportunitytoexploitshalegasasconcludedinastudyofthe
AustralianCommitteeofLearnedAcademies(ACOLA).Thereportnotesthat“shalegashas
thepotentialtobeaneconomicallyveryimportantadditionalenergysource.”
11IbisWorld(6)
12BureauofResourcesandEnergyEconomics(8)
13Ibid
14IBISWorld(5)
4 Miningpolicypaper:
MaintainingAustralia’sminingcomparativeadvantages
This report can be found at www.acola.org.au © Australian Council of Learned Academies
Australia’sminingsector
2.2 Mining investment
MininginvestmentinAustraliafrom2002to2012hasbeenhigh,andhasbeenamajordriver
ofeconomicgrowth. Mininginvestmentwas7.7%ofAustralia’sGrossDomesticProduct
(GDP)attheendof2012risingfrom1.5%ofGDPadecadeago.15Themajorreasonforthe
investmentincreasewassoaringdemandfromAsianeconomies,particularlythatofChina.
By2013however,mininginvestmentpeaked.TheBureauofResourcesandEnergyEconomics
believethatinlate2013,$150billionofhighvalueprojectsthatwereatthefeasibilitystage
havebeendelayedorcancelledsinceApril2012.IntheOctober2013listingtherewere63
projectsattheCommittedStagewithacombinedvalueof$240billion,comparedwith73
projectswithacombinedvalueof$268billionsixmonthsearlier.Thisvalueispredictedto
fallto$70billionbytheendof2017.Iftheseforecastsarecorrect,thepeakininvestment
passedinOctober2012,when$268.4billionwascommittedtoprojects.16
Theviewisthatamininginvestmentdeclinewilloccurfrom7.7%ofGDPin2012to5.5%of
GDPby2016,fallingbelow4%ofGDPby2023.17 Intheir2013-14Budgetdocuments,
FederalTreasuryseeamodestdeclineinmininginvestmentin2014-15,withsharperfallsover
2015-16and2016-17.Thereasonsforapeakingandforecastdeclineinmininginvestment
include:18
 Risingcosts,decreasingproductivityandmoreregulationandtaxesofwhichare
punishingtheindustry
 Adeclineincommoditypricesgloballyasthesupplyofcommoditiescatchupto,and
insomecasesexceed,thedemandforthesecommodities
ThisinvestmentdeclineisevidencedbyBHPBillitonwhohaveannouncedareductionin
capitalandexplorationexpenditurefromUS$21.7billionin2013toUS$16.2billionin2014
andthefocuswillmovetogeneratingmorevolumefromexistingequipmentandthelowering
ofunitcosts.19Similarly,RioTinto’scapitalexpenditurehasbeenreducedby26%toUS$12.9
billionin2013,comparedtothepeaklevelin2012ofUS$17.6billion.Itisexpectedtobe
reducedfurthertoaroundUS$11billionin2014.
“Intoday’scapital-constrainedenvironment,onlythehighest-returninginvestmentswillbe
approved.TheGroupanalyseseachinvestmentbasedonnetpresentvaluebutalsoconsiders
anumberoffurtherfactors,includinginternalrateofreturn,paybackperiodandrisk
profile.Thissuiteofrankingcriteria,togetherwiththeapplicationofstrategicjudgment,
ensuresthatcapitalisdeployedtothebestopportunities.Ourresponsetothishasbeento
focusoncosts,cashflowandcapitaldiscipline.Othersinthesectorhaveembarkedupon
similarpaths.Inefficienciesarealsobeingexposed,andsoreductionsincostsandcapital
expenditure,productivityimprovements,andprojectdeferralsandcancellationshave
becomeaprominentpartofminingindustrystrategy.”(RioTinto,AnnualReport2013)
Table2summariseschangesintheindexofbasemetalcommoditypricesoverthepast20
years.TheindexisbasedoninformationsuppliedbytheReserveBankofAustralia(RBA)who
useaweightedbasketofcurrencies(US$,Euro,Yen,andUK£)establishedbythe
InternationalMonetaryFund(IMF)toestablishprice(andknownas‘SpecialDrawingRights’
orSDR).Itisquiteclearthattherewasamajorincreaseinbasemetalpricesuntil2011,anda
steadydeclineuntilMarch2014.
15DeloitteAccessEconomics(9)andRBA(10)
16MiningCouncilofAustralia(11)andBureauofResourcesandEnergyEconomics(12)
17DeloitteAccessEconomics(9)
18MiningCouncilofAustralia(11);DeloitteAccessEconomics(9)andBureauofResourcesandEnergyEconomics
(12)
19MiningCouncilofAustralia(13)andBHPBilliton(14)
5 Miningpolicypaper:
MaintainingAustralia’sminingcomparativeadvantages
This report can be found at www.acola.org.au © Australian Council of Learned Academies
Australia’sminingsector
Table2:RBAindexofbasemetalcommodityprices
DATE March March March March March March March March
1995 2000 2005 2010 2011 2012 2013 2014
PriceIndex 55.8 56.0 75.2 107.9 123.9 108.1 100.6 90.2
(2012/13=100)
Source:RBA(March2014)Indexofcommodityprices
TheBureauofResourcesandEnergyEconomicshavestatedthatAustraliaisnowseeinga
transitionfromtheinvestmentphaseoftheresourcesboomtotheproductionphaseasnewly
developedprojectscommencecommercialproduction.Theprojectscompletedin2012and
2013“haveaddedconsiderablytoAustralia’sproductioncapacityandwillsupportstrong
commodityexportvolumesintothefuturewithalastingimpactontheAustralianeconomy.”20
Section4examinesscenariosforpotentialfuturetrendsformininginvestmentinAustralia.
2.3 Current issues and analysis
AnumberofcurrentissuesandchallengesarefacedbytheAustralianminingindustry.These
areshowninAppendix1.ThedetailedinformationinAppendix1(withsources)canbe
summarisedasaSWOTanalysis(Strengths,Weaknesses,Opportunities,andThreats)as
shownbelowinFigure1.Forfurtherelaboration(andsources)pleaserefertoAppendix1.
Figure1:AustralianminingsectorSWOTanalysis
20BureauofResourcesandEnergyEconomics(12)
6 Miningpolicypaper:
MaintainingAustralia’sminingcomparativeadvantages
This report can be found at www.acola.org.au © Australian Council of Learned Academies
Australia’sminingsector
7 Miningpolicypaper:
MaintainingAustralia’sminingcomparativeadvantages
This report can be found at www.acola.org.au © Australian Council of Learned Academies
3 Comparative advantages
& disadvantages
ThissectionexplorestheAustralianminingsector’ssourcesofcomparativeadvantageand
considerswhetherAustraliahastheabilitytomineoresandproducemineralsmore
advantageouslythanothercountries.Thiswouldconsideraspectsoflowercost,greater
reliability,andlowerrelativerisk.Inaddition,viewsaresummarisedonwhetherthe
comparativeadvantageissustainable,andtherequirementstomaintaintheadvantage.
3.1 Current mining comparative advantage
Comparedwithmanycountries,Australiahasacomparativeadvantageintheproductionof
mineralcommodities.21Thisstemsfromarangeoffactorsincluding:
 Arichanddiversemineralendowment
 Highquality,regional-scalegeoscienceinformationwhichlowerstherisksof
exploration
 Advancedexploration
 Miningandprocessingtechnologies
 Askilledworkforce
 Generallybenignphysicalconditionsandlowpopulationdensity.
Thesefactorsmeanthatmodernminingcanbeundertakeninlinewithincreasing
communityexpectationsforenvironmentalandsocialperformance.
Inrecentdecades,improvementsinminingtechniques(includinglarge-scalemining
equipmentandautomation)havereducedminingcostsandallowedeconomicextractionof
depositsthatwerepreviouslyuneconomic.Newmetallurgicaltechniquesandbreakthroughs
(suchascarbon-basedleachingtechnologiesforgolddeposits)haveimprovedtherateof
recoveryforcertainmetalsandmineralsorenhancedtheeconomicviabilityofotherdeposits
(suchaslateriticnickel)resultinginmajorincreasesintheseeconomicresources.
AsatDecember2011,Australiahadtheworld’slargesteconomicresourcesofgold,ironore,
lead,rutile,zircon,nickel,uraniumandzinc.Thecountryalsoranksamongthetopsix
worldwideforknownresourcesofantimony,bauxite,blackcoal,recoverablebrowncoal,
cobalt,copper,diamond,ilmenite,lithium,manganeseore,niobium,silver,tantalum,
tungstenandvanadium.Australiaistheworld’sleadingproducerofrutile,zircon,bauxite
andalumina,thesecondlargestproducerofgold,ironore,lithium,manganeseore,leadand
zinc,thethirdlargestproducerofilmeniteanduranium,andthefourthlargestofsilver,
nickelandblackcoal.
Australia'smineralresourcesareadequateforminingtocontinueasthemostimportant
exportearningsectoroftheAustralianeconomyfortheforeseeablefuture.Foragiven
resource,ratiosofEDRtocurrentmineproductionprovideindicativeestimatesofthe
resourcelife.Usingtheseratios,weseethattheEDRofmostofAustralia’smajor
commoditiescansustaincurrentratesofmineproductionformanydecades.Commodities
21GeoscienceAustralia(1,2)
8 Miningpolicypaper:
MaintainingAustralia’sminingcomparativeadvantages