At a glance
- In this article Richard Conacher, Senior Claims Adjuster at Zurich examines Australia's mining industry
- We explore the problems that the industry is experiencing such as exhaustion of supply, as well as oversupply in others that have led to falling prices, environmental issues and workforce issues
- This article was featured in our newly launched Zurich Quarterly Claims Journal
Mining has been a feature of man’s activities ever since civilization began. The earliest examples of mining were stone, ceramics and later metals, all found close to the Earth’s surface. This mining was used to make early weapons and tools particularly using flint. Mining on the industrial level that we know today really began in the early part of the 20th century with the gold and silver rushes in Australia, California and parts of Africa.
This article examines the current strengths and weaknesses of the mining industry in Australia, concentrating on four of the minerals and metals that are the most important to Australia’s mining industry.
Mining in Australia has always been a significant industry and has driven waves of immigration during various mining booms. We explore the problems that the industry is experiencing such as exhaustion of supply in some cases, as well as oversupply in others that have led to falling prices, environmental issues and objections and workforce issues. The impact of the slowdown in the global economy post 2008 is also examined as is the rise (and to an extent) the fall of the Chinese economy.
Production and exports of Australian coal have grown substantially since 1980 and are forecast to continue to rise over the next few years. The labour, infrastructure and electricity problems that are present in, for example, South Africa’s coal industry are largely absent in Australia.
Beginning in the 1980’s Australian coal has been supplying the great demand for electricity from Asia where 35% of the electricity is produced by coal. In later years Australia has received competition in this supply from China and Indonesia but the real question mark for Australian coal is the extent to which China and other Asian nations will adopt renewable energy sources.
The Australian resources minister is bullish about the future of the industry with or without China saying that China is “not the only game in town” and pointing to India as a growing market for coal.
This is, however, at odds with India’s stated aim of reducing imports of coal and also BMI Research feels that the immediate future for Australian coal is bleak with lowering prices and increased competition from South America meaning that production growth will remain weak for the next two years at least.
The majority of Australian gold is mined in Western Australia where it is the fourth largest commodity sector. The peak of gold mining in the state was between its discovery in the 1880’s and 1903 by which time the majority of the shallow gold had been exhausted.
The industry received a great boost in the 1980’s by the discovery of nickel. The associated new technologies allowed for the reopening of many gold mines as gold was now profitable at much lower yields. Gold is still seen as a cornerstone of the Australian mining industry owing to its huge remaining reserves, however, its share of global gold production has fallen in recent years.
The difficulty is that the remaining gold is deep and so the volume actually produced is falling in comparison to countries such as those in South America where gold mining is a newer industry. Being able to identify and mine the deep gold profitably is proving to be a challenge as investors are choosing to invest more in coal and iron ore exploration in order to satisfy Chinese demand.
Complex regulatory burdens also discourage investors and if the industry is to do more than survive up to and beyond 2020 it will have to do more to enhance its position in capital markets.
Iron ore is a fairly new industry within the history of mining with commercial production not beginning till the 1970’s. As at last year Australia is the second biggest producer of iron ore with only China ahead of it. 98% of iron ore is used to make steel and so the fortunes of the industry are largely dependent on global demand for steel therefore are very vulnerable to global recessions and reductions in global construction projects and other industrial developments.
Although Australian exports of iron ore have been growing over the last fifteen years the price peaked in 2011 at approximately USD 180 per tonne and has been falling since, it is currently approximately USD 65 per tonne resulting in the Australian economy pivoting away from iron ore. The industry however feels that demand will catch up with supply and is in fact ramping up production; despite concerns that this strategy will flood the market and drive prices down further and force smaller firms out of the industry.
The lower prices are expected to be compensated from higher export volumes to China and India. It is anticipated that as these countries still have some way to go on the journey to full urbanisation that demand for steel will stay strong.
Australia, which has been mining copper in Queensland since the late 19th century, is the fifth largest producer of copper and once again it is China that is driving the demand.
Volumes of copper export increased substantially in 2005 following which volumes have fluctuated greatly although the general trend is upward. Copper is used in so many items concerned with infrastructure and transport that the industry is very optimistic for the medium to long term future, this being based on the premise that demand for copper evolves with economic development.
The main challenges for the industry are twofold:
- Is there is enough copper of sufficiently high grade to be able to satisfy demand at a profitable margin
- If so can they mine it at a profit before countries such as Chile with newer and less depleted reserves become greater suppliers of world demand?
With the better quality copper reserves becoming more and more depleted efforts are being made to increase margins by improving efficiencies through technologies such as continued improvements in the process of economic leeching and electro winning of copper from low grade ores.
The road ahead
The long term forecast for mining in Australia is not entirely favourable, as it continues to evolve away from the mining industries that were so important to the early European settlers. Australia has, to a large extent, been built on the back of mining but now coal suffers from the effects of global over supply, and gold from the dwindling supply still being economically reachable. The future is perhaps brighter for iron ore and copper, although both of these products have their viability and future linked to the emerging economies, particularly China. The general consensus of economic analysts is that the Chinese economy is slowing but what is much more debatable is if China will continue a gradual slowdown or suffer a hard landing. A hard landing will have repercussions far beyond China’s borders and there are calls for Australia to become less dependent economically on mining.
Australia is not immune to the environmental issues that so many other counties also face and mining firms are increasingly under pressure to reduce their environmental footprint. This is of course particularly so in the non-renewable sector and finding ways to do this without seeing profits fall is going to be a challenge.
The longer term prospect of mechanical and automated enhancements in the industry, including driverless trucks which are already in operation at some mines, will assist in cutting costs, even if at the cost of jobs. The question then of what Australian mining will look like in a few years from now is therefore a difficult one to answer and research will lead the reader to different answers depending on whether the article is written by an economist, an environmentalist, an industry insider, or a mining company itself. We should remember that the industry has weathered storms before and has survived through previous periods of global recession.
Therefore, it is my opinion that the industry in Australia is not likely to look fundamentally different in the medium term. In the longer term the question that will need to be answered is how much longer the ever increasing costs of reaching the deeper seams will remain a profitable exercise.
This article was published as part of our first Commercial Claims Quarterly Journal. Click here to download the full journal.