Australian mining is losing global market share to rapidly emerging resource-rich economies, says a report from the Minerals Council of Australia.
Australia’s mining boom is not over, says a study commissioned by the Minerals Council of Australia, but its dynamics have changed and its policy demands are greater and more urgent.
The report by the Australian strategy consulting firm, Port Jackson Partners, is the “most detailed panorama yet painted of the burgeoning cost environment in Australia, our deteriorating reputation as a place to do business and the threat this poses to our ability to capture market share and future investment,” said the Minerals Council.
In the study, Port Jackson Partners suggest that over the next 20 years, demand for key minerals will increase by between 50% and 200%. While growth in iron ore demand slows as infrastructure is developed, “there is likely to be new growth in demand for products such as copper, aluminium and other minerals and metals and consumers demand more sophisticated products.”
“If Australia can maintain market share through the next two decades, the country’s minerals revenue could increase by $121 billion per annum by 2031–a 65% increase for a sector already twice the size it was in 2006,” the report suggests. “Capturing this potential depends on out-competing our rivals for new projects.”
At existing mining operations, Australia’s cost position is declining with more than half of the nation’s mines experiencing operation costs above global averages, the study asserted. “Increased labour, energy and transport costs have all played a part.”
By 2020, Australian iron ore projects beyond the Pilbara are forecast to have higher delivered costs than benchmark Brazilian producers, and will cost up to 75% more to build than projects in West Africa, the study found.
For both copper and nickel, nearly half of Australia’s production is now in the most expensive 25% of mines globally.
“Previously untapped resources in the developing world are rapidly coming onstream,” said the report. “These new competitors are strengthened by improved policy settings, new technologies and new sources of capital.” The new competitors include the Democratic Republic of the Congo, Mongolia and Mozambique which are developing and sometimes reviving mineral industries by improving their institutions.
The report suggests that Australia is losing the battle for mining market share. “While volumes have grown in important commodities, our market shares are at best stagnant, and in some cases declining…”
Two important indicators of Australia’s competitive strength and the mining investment environment are in decline, the study advised. For instance, mining sector productivity “has fallen markedly and is well down from the historical highs.”
Meanwhile, Australia’s share of global exploration expenditure is also declining from 20% in the 1990s to 13% today. “At a time when global exploration activity has grown strongly, this loss of share represents a considerable missed opportunity. It speaks directly to the relatively weakness of Australia’s competitive position outside of iron ore,” said Port Jackson Partners.
“Capital costs for projects in Australia are rising faster than elsewhere…iron ore projects, for example, are currently 30% more expensive than the global average,” said the report. For instance, thermal coal project costs are 66% above the global average.
Australian projects are also more prone to delays, “which contribute to cost escalation as well as increasing perceptions of investment risk.”
Aided by policy reform, new technologies and new investors, rivals are emerging to Australian mining which are offering improved policy settings that are generating more attractive investment climates, the report suggested. “The speed and methods by which new rivals are emerging and their quality when they do emerge is not widely appreciated.”
For example, new in situ leaching techniques made high carbonate Kazakh uranium ores cheaper and quicker to bring on stream, increasing Kazakhstan’s share of global uranium production to 30% today.
Rapidly escalating capital costs are also threatening the attractiveness of some Australian iron ore projects, Port Jackson Partners observed. “In 2020, Brazilian iron ore will be cheaper to deliver to China in operating cost terms than iron ore from all but the established Pilbara projects.”
New investment models are also supporting new mining competitors as the long dominant western capital markets give way to Asian and Middle Eastern investors as important sources of mining project capital, the study advised. For instance, China’s state-owned enterprises “now view Africa as the preferred destination of iron ore investment.”
The report also suggests that much of Australia’s thermal coal project pipeline is at risk. For example, the average Australian project’s incentive price is almost 50% higher than the average Indonesian coal project.
Port Jackson Partners also asserted that Australia is “losing the chance to create a new opportunity to export bauxite” as its domestic aluminum smelting sector is uncompetitive on both capital and operating costs. “Although our competitive position in processing is poor, Australia is well positioned to supply the emerging bauxite market into China.”
The future of Australian copper and nickel is also uncertain, the report suggested. Beyond the massive Olympic Dam, which had to postpone further mining expansion, Australia’s copper pipeline is characterized by “small, uncompetitive projects.”
“Australia has a weak and worsening cost position in nickel,” said the report. “In 2012, 81% of Australia’s nickel production had costs above the global average, up from 63% in 2006.”
“Australia’s nickel industry has, perhaps more than other sectors, experienced the impact of new rivals through technological innovation. Widespread use of nickel pig iron (NPI) technology has allowed extraction of previously uneconomic resources.”
Port Jackson Partners suggests the need for change in the mineral sector must be recognized, especially in recognizing and addressing policy imperatives. “At present, the national dialogue on the mining industry focuses primarily on how to distribute the earnings of the mineral sectors, not on the actions needed to ensure those benefits continue.”
Cost pressures on current operations and project should be addressed immediately, said Port Jackson Partners, including mobilizing all available skill labor and ensuring unfettered access to globally competitive suppliers.
The report also calls for a new program of long-term structural reform to help Australian mining regain world-leading competitiveness. These reforms include building university capacity; reorienting workplace relations toward ‘win-win’ deals that reward more production with more pay; reforming the project approval process to reduce delays and operating costs; and locking in stable and internationally competitive tax and royalty agreements.
The study also stressed that “mining approvals processes need to be overhauled to improve speed and enhance predictability.”
Meanwhile, “governments at all levels in Australia should commit to stable and competitive tax and royalty regimes to ensure investor confidence in our resource taxation arrangements,” said the report
Port Jackson Partners praised the Australian mining sector’s increased emphasis on research and development since the mining boom began. The nation spends around $4 billion annually on mining R&D.
Nevertheless, the study observed that Australia has yet to employ autonomous copper mining, microwave-based enhanced ore recovery, and driverless trains, although Australian mining does use autonomous drilling and remote operations centers.
“The prize for getting the framework for minerals resource development right is immense,” said Mitch Hooke, CEO of the Minerals Council of Australia, “but it will take hard work from both industry and government to secure the economic opportunity that is currently at risk.”
To download the report, Opportunity at risk, Regaining our competitive edge in mineral resources, go to www.minerals.org.au