Mining exports still going strong

Australia has posted it largest trade surplus in 18 months as mining exports remain strong.

It was the fourth consecutive monthly surplus.

The balance of goods and services was a surplus of $670 million in May, from $171 million in April, the Australian Bureau of Statistic showed on Wednesday.

During the month, exports rose 4.0 per cent, while imports rose 2.0 per cent, the ABS said.

JP Morgan economist Tom Kennedy said increased volumes of mining and resources exports are starting to come on line after record levels of investment in the sector.

“The recent improvement in the trade data is more of a volumes phenomenon, owing to increased supply capacity following the enormous amount of investment over the past few years,” he said.

“Even though China is slowing down, we’re actually seeing that we’re winning a greater share of global trade in hard commodities.”

Mr Kennedy expects imports of capital goods to ease, with demand to decline following the peak in resources investment later this year.

CommSec economist Savanth Sebastian said the strong export result was driven by the mining and resources sector.

“There were strong exports of iron ore and coal and there was relatively healthy pricing.

“More importantly the falling currency is going to extend that trade story.

“There are good signs that the rebalancing of the economy, away from mining will start to take place.”


Big miners regaining favour

Tony Featherstone is a Morningstar contributor and a former managing editor of BRW and Shares magazines. This article was originally published by Investor Weekly, a Sterling publication.

What a difference a few weeks makes. In September, newspaper headlines screamed about the meltdown in iron ore prices, and resource stocks tumbled. Commentators called an “end” to the mining investment boom amid fears that China’s economy was heading for a hard landing.

After tanking to US$88 a tonne last month, the iron ore price has rebounded to US$120 a tonne. Fortescue Metals Group (FMG) this week said it expects the iron ore price to stablise at current prices; Macquarie Equities Research sees a floor of US$115 over the next few years.

The big mining stocks have followed the iron ore price higher. Australia’s third-largest iron ore miner, Fortescue, has stunningly rallied from below $3 in September to $4.07. Macquarie has an outperform recommendation on it.

Rio Tinto (RIO) has jumped from a 52-week share price low of $48.37 to $56.05, and BHP Billiton (BHP) has rallied from an annual low of $30.09 to $33.45. Their prices are still well down on peak levels over the past 12 months, but sentiment has improved markedly from a few weeks ago.

Macquarie has outperform recommendations on Rio and BHP. Its 12-month share price targets of $76 and $39 respectively for Rio and BHP suggest considerable upside and a catalyst for a sharemarket rally in 2013 given the high weighting of these stocks in the S&P/ASX 200 index.

Several small and mid-size resource stocks are also starting to rally, after heavy falls this year.

Solid quarterly production reports from the big miners have also buoyed investors, and reports last week of better-than-expected Chinese export data led to calls that its economic slowdown may have bottomed.

A resumption of stronger Chinese growth would support higher commodity prices and potentially higher share prices of leading ASX-listed resource stocks.

Mining services stocks with heavy iron ore exposure, such as NRW Holdings (NWH), also rallied this week after sharp falls in recent months. Tumbling iron ore and coal prices raised fears that more mining projects would be cancelled or deferred, in turn leading to less work for service providers.

Conditions are not as strong as a year ago, but fears about some mining services stocks may have been overstated.

Leighton wins billion dollar Pilbara mining contract

In a reverse of the current trend, Leighton Contractors has been awarded a $1.5 billion, full service contract in the Pilbara.

The award sees its provide mining services at Fortescue’s Firetail iron ore deposit.

According to Leighton, sits mining division will provide whole of mine management at the site, including operating and maintaining the open cut mining fleet, ore handling plants, and associated infrastructure.

It will add the miner in producing around 20 million tonnes of iron ore per annum from Firetail, which forms part of the wider Solomon Hub.

Hamish Tyrwhitt, Leighton Holding’s CEO, said the contract is evidence of the group’s ability to deliver long term sustainable growth.

“Leighton Contractors has worked with Fortescue to negotiate a win-win outcome whereby they provide the bulk of the capital to purchase the mining plant and equipment, and we bring our core competency of contract mining to add value for the client,” Tyrwhitt said.

Fortescue’s CEO Nev Power the award of the contract is a “key milestone in our expansion to 115 mtpa by the end of the March quarter 2013.

“This follows the commissioning of the second train unloader at Herb Elliot Port last week.”

Craig Laslett, MD of Leighton Contractors, said this “is underpinned by our expertise in iron ore, in which we have mined and processed approximately 500 million tonnes over the last five year.

“This contract also provides the opportunity to improve efficiencies through the introduction of the latest technology in the mining industry.”

Laslett added that the contract included a commitment to use graduates of Fortescue’s indigenous training and employment program VTEC.

Leighton will be operations this month, with the contract expected to run for five years, with a two year extension option.

It will initially employ around 600 workers at the site.

Mining Boom is NOT over

Well said Terry Ryder!

“There are too many instances of resources announcements to list in detail, but here are some snippets from the past couple of days: Aust Pacific LNG has issued a $280 million contract to WDS for site works for 345 gas wells; Mitsui will help fund a $380 million coal project by NuCoal Resources in the Hunter Valley; Fortescue Metals has finalized a refinancing deal to raise its borrowing capacity to $US12.8bil; Meijin Energy Group is making a $435 million bid for Western Desert Resources which has a Northern Territory mine; gold producer Focus Minerals has entered into a share subscription deed with Shandong Gold of China for $230 million; the WA Government has lent environmental support to Toro Energy’s Wiluna uranium project; Leighton Holdings has won a $134 million contract from Santos to build a 4km gas transmission tunnel from Gladstone to Curtis Island; Karara Mining has opened its 16mtpa iron ore terminal at the port of Geraldton … The Resources Revolution continues.”

Australian mining seen as vulnerable to competition from emerging nations

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

Too expensive: Mining industry at risk

Australian miners are no longer competitive, are losing market share and many projects are under threat. $121 billion in revenues each year are at risk says a report commissioned by the Minerals Council of Australia (MCA).

More than half of Australia’s coal, copper and nickel mines are more costly that the global average. Even in iron ore, Australia is losing its operating cost advantage, for most projects except for the established mines in the Pilbara, Western Australia. BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) have long had some of the world’s lowest cost iron ore mines, but increasingly, miners from Latin America and Africa are matching or undercutting their costs.

Rapidly emerging resource-rich countries are stealing our market share, as rising costs, declining productivity and a deteriorating sovereign risk reputation, make Australia a less attractive place to do business.

Labour costs have increased dramatically, mainly due to skills shortages, with construction workers’ salaries increasing by an average 9% per year over the last three years and Australian engineering wages are 60% above the global average. The last year Australia reported an increase in productivity was 2003, while the Federal and state governments’ ongoing changes to royalties, carbon tax and resources tax schemes may have contributed to our loss of market share. Only iron ore managed to post a positive gain in market share over the past 10 years, and that was by just 1%.

Increasingly, Australian miners are looking overseas for opportunities. 160 listed Australian mining companies were pursuing African mining projects in 2010, compared to just 54 in 2003.

Other miners are exploring in other regions, such as Troy Resources Limited (ASX: TRY) with operations in Brazil and Argentina, while Kingsrose Mining Limited (ASX: KRM) operates a gold mine in the Phillipines. Both companies have significantly lower costs of production that the average Australian gold miner.

The Minerals Council report suggests that Australia needs to take several steps immediately to alleviate the problems, including discussion of the opportunities and benefits at risk, address cost pressures – including labour and input costs and a new program of structural reform to help the resources industry regain its world-leading competitiveness.

While you could expect the Minerals Council to push their own barrow, the report does raise some important points about what Australia could do to improve the mining industry. If we don’t, we could face losing billions of export dollars from commodities.


BIS Shrapnel: Investment boom has many years left

Very refreshing to see commentary on the state of the resources sector based on genuine analysis rather than a desire to make tomorrow’s newspapers. BIS Shrapnel analysts speaking at a Brisbane event say the investment boom has many years left to run. They note that prices for some commodities have dropped but that resources companies still had 42% profit margins in the year to June. Frank Gelber of BIS predicts a soft landing as resources investment gradually winds back its from peak, to be replaced by investment across other business sectors. Meanwhile, the Australian Petroleum Production and Exploration Assoc says the gas industry shows few signs of slowdown.


This mining boom will end in the next year or two, but there will be another: Shane Oliver

The past week has brought much debate and consternation in Australia as to whether the mining boom that has supposedly propelled the economy for the last decade is over. This followed the cancellation or delay of various resource investment projects, including the massive Olympic Dam expansion and a fall in commodity prices over the last year.

But is it really over? And would it really be the disaster for Australia that many fear? After all, we have had years of hearing about the two-speed economy where the less resource-rich south-eastern states were being left behind, and it was said that the people of western Sydney were paying the price (via higher than otherwise interest rates and job losses) for the boom in Western Australia, so many Australians might be forgiven for thinking good riddance.

Semantics and confusion

Much of the debate about whether the mining boom is over has been characterised by confusion as to what is being referred to, with some focusing on commodity prices, others on mining investment projects and others saying that technically it hasn’t even begun until mining and energy exports pick up. In broad terms the mining boom that has gripped Australia for the last decade likely has three stages.

The first stage or Mining Boom I (MB I) began last decade and brought surging resource commodity prices driven by industrialisation in China. This resulted in a rise in Australia’s terms of trade to near record levels (see next chart). This phase was initially good for Australia last decade as it seemingly benefitted everyone. Resource companies got paid more for what they produced. Their profits surged. They employed more people. They paid more taxes, which led to budget surpluses and allowed annual tax cuts. They paid more dividends and their share prices went up. The $A rose but not to levels that caused huge problems for the rest of the economy. So not only did the resources companies benefit, but there was a big trickle-down effect to almost everyone else. As a result the economy performed very strongly and unemployment fell below 4%.

The second stage, or Mining Boom II, has been characterised by a surge in mining and energy investment. This has been underway for the last few years and will take mining investment from around 4% of GDP in 2010 up to around 9% in 2013, contributing around 2 percentage points to GDP growth in each of 2011-12 and 2012-13.

The third stage, or MB III, will presumably come when resource exports surge on the back of all the investment.

So where are we now?

In terms of the commodity price surge that characterised MB I it’s likely that we have either seen the peak or the best is over with more constrained gains ahead:

  • Firstly, the pattern for raw material prices over the past century or so has seen roughly a 10-year secular or long-term upswing followed by a 10- to 20-year secular bear market, which can sometimes just be a move to the side.

The upswing is normally driven by a surge in global demand for commodities after a period of mining underinvestment. The downswings come when the pace of demand slows but the supply of commodities picks up in lagged response to the price upswing. After a 12 year bull run since 2000 this pattern would suggest that the commodity price boom may be at or near its end.

  • Global growth appears to have entered a constrained patch as excessive debt levels in the US, Europe and Japan constrain growth and potential growth in China, India and Brazil looks like being 1 or 2 percentage points lower than was the case before the GFC. This means slower growth in commodity demand going forward.
  • The supply of raw materials is likely to surge in the decade ahead in response to increased investment.
  • Finally, the surge in commodity prices since 2000 was given a lift by a downtrend in the US dollar from 2002 as commodity prices are mostly priced in US dollars. This has now likely largely run its course.

Taken together, this would suggest that the best of the commodity price surge since 2000, or MB I, is behind us. There are two qualifications though. First, after the recent short-term cyclical slump there will still be a rebound, probably into next year as global growth picks up a bit.

Second, it’s way too premature to say that the surge in demand in the emerging world is over, China and India are still very poor countries with per capita income of just $US8,400 and $US3,700 respectively, compared with $US40,000 in Australia, suggesting plenty of catch-up potential ahead and related commodity demand.

In terms of MB II, while the cancellation of Olympic Dam and other marginal projects indicates that projects under consideration have peaked, this does not mean the mining investment boom is over. In fact it probably has another one to two years to run. Based on active projects yet to be completed there is a pipeline of around $270 billion of work yet to be completed. Iron ore-related capital spending (on mines and infrastructure) is likely to peak this financial year, and coal and liquid natural gas related investment is likely to peak in 2014-15, suggesting a peak in aggregate around 2014.

In other words, the boom in mining investment has 18 months or so to run before it peaks and starts to subside back to more normal levels. But what can be said though is that, with the cancellation of marginal projects that were in the preliminary stage, the end is coming into sight.

Finally, MB III or the pick-up in export volumes flowing from the surge in mining investment in iron ore, coal and LNG will start to get underway around 2014-15.

Heading towards a more balanced economy

Talk of the end of the mining boom has created a bit of nervousness regarding the outlook for Australia. However, the reality is that the current stage of the mining boom focused on mining investment has not been unambiguously good for the economy, and at its end I hope Australia will return to a more balanced economy.

It was always thought that after two or three years the surge in mining investment would settle back down as projects ran their course. Trying to do a whole lot of projects in a relatively short space of time was always fraught with the threat of excessive cost pressures and an excessive surge in supply. We are now seeing market forces kicking in to rationalise resource projects and so the more marginal projects are being delayed. This is a good thing as it will reduce cost pressures, leave work for the future and reduce the size of the commodity supply surge over the decade ahead, thereby helping avoid a crash in commodity prices.

The cooling down of the mining investment boom should help lead to a more balanced economy. MB II has not been good for big parts of Australia. With roughly 2 percentage points of growth coming from mining investment alone it has really put a squeeze on the rest of the economy. Housing and non-residential construction, retailing, manufacturing and tourism have all suffered under the weight of higher than otherwise interest rates and a surge in the $A to 30-year highs.

What’s more the boom in mining investment has meant that the federal government has not seen the tax revenue surge it got last decade, so last decade’s regular tax cuts have not been possible and this has weighed on household income.

This is all evident in the Australian share market which has underperformed global shares since late 2009, with the resource sector being the worst performer over the last year as resource sector profits have fallen 15% or so.

So the end of the mining investment boom, to the extent that it takes pressure off interest rates and the Australian dollar, should enable the parts of the economy that have been under the screw for the last few years to rebound leading to more balanced growth. This is also likely to be augmented by a pick up in resource export volumes equal to around 1% of GDP from around 2014-15 according to the Bureau o fResource and Energy Economics.

Of course a risk is of a timing mismatch around 2014 as investment slows down with other sectors taking a while to pick up. To guard against this the Reserve Bank will clearly need to stand ready to respond with lower interest rates.

The bottom line is that the end of the mining investment boom in a year or two won’t necessarily be bad for the Australian economy and will likely see a return to more balanced growth.

Concluding comments

It’s premature to call the end of the mining boom just yet. The peak in mining investment probably won’t be seen till 2014 and thereafter actual mining production and hence exports will start to pick up. However, the best has probably been seen in terms of commodity price gains and the end of the investment boom is starting to come into sight.

While there may be the risk of slower growth as the Australian economy shifts gears away from mining investment in 2014 to mining exports, construction and other parts of the economy that have been subdued, the end of the investment boom should lead to a more balanced economy reflecting less pressure on the interest rates and the $A.

For investors there are several implications including:

  • Ongoing pressure for lower interest rates as the risk of an overheating economy subsides. This means that term deposit rates are likely to fall further in the years ahead.
  • The best has likely been seen for the $A, implying less need to hedge global shares back to Australian dollars.
  • Resources shares are currently cheap and should experience a cyclical rebound when confidence in global growth improves. However, beyond a short term bounce it’s likely that the cooling of the mining boom will allow a return to a more balanced share market with domestic cyclicals likely to perform better.

Dr Shane Oliver is head of investment strategy and chief economist at AMP Capital


BHP Billiton – Jimblebar $4 billion contract

Just in case anyone thinks BHP Billiton has given up on mining altogether, it has just handed a major construction contract to engineering firm Monadelphous for its $4 billion Jimblebar iron ore mine in WA. Construction work is scheduled to start next month. The Resources Revolution continues …


ABS: There’s plenty of life left in the resources sector

The investment statistics published by the ABS show there’s plenty of life left in the resources sector. Spending intentions by businesses in the mining industry point to another big rise this financial year. After a 33% rise in FY2010 and a 75% increase in FY2011, investment in the mining sector will rise a further 41% in FY2013. $82bil was invested in FY2012 and the figure for FY2013 is projected to be $116bil. The Resources Revolution continues …