A new report from leading independent economic forecaster and industry analyst, BIS Shrapnel indicates a new war on costs within the mining industry caused by pressure from lower commodity prices, rising costs and low labour productivity. However, this will not threaten a forecast boom in mining production over the next decade.
According to the Mining in Australia 2012 to 2027 report, mining investment, production, contractor services and employment will follow very different paths over the next five years. While the mining investment boom in Australia will peak soon and then decline, it will remain at very high levels overall. Meanwhile, a new boom is developing in mining production and services such as maintenance.
However, growth in employment will not keep pace with the expansion in production as miners seek to restore productivity lost during the furious race to invest in new capacity since the mid-2000s.
According to Adrian Hart, Senior Manager of BIS Shrapnel’s Infrastructure and Mining Unit, labour productivity in the mining sector is now 60% off its peak in 2000/01 and at its weakest level since 1987.
Faced with rising wage costs, construction cost blowouts, increasing regulation and additional taxes and royalties, miners are now taking an extremely tough approach in dealing with contractors, suppliers and governments to reduce costs, improve productivity and restore competitiveness over the next five years and beyond.
The challenges aside, Hart believes this will provide golden opportunities for suppliers and contractors to the mining industry. The challenges will come from the bigger miners striking tougher bargains to secure contracts and bringing work in-house when cost objectives can’t be met, with the next five years expected to be a battle of the balance sheets between miners, suppliers and contractors as the industry seeks to lower costs and restore productivity.
However, miners will also ramp up production from new mines and expansions to offset lower commodity prices, and integrate and optimise existing operations, sharply increasing the size of the pie for maintenance and other services. Contractors who demonstrate their flexibility in this environment can expect to see substantial growth in work and revenues over the next five years though margins will be under pressure.
Key findings from the Mining in Australia 2012-2027 report:
BIS Shrapnel’s commodity price index has fallen 20% over the year to September 2012. Though a modest increase in commodity prices is expected from higher industrial production over the next few years, increasing supply will keep price growth in check.
Currently close to $7 billion annually, triple the levels of the early to mid-2000s, exploration is expected to oscillate around this mark for much of the next five years, led by oil and gas, iron ore and coking coal.
Fixed Capital Investment
Having more than trebled over the past five years to an estimated $71 billion in 2011/12, fixed capital investment is expected to peak in 2012/13 at $77 billion (in constant 2009/10 prices). This includes investment in buildings and structures (including ports and railways) as well as plant and equipment.
Though decline is expected, fixed capital investment will not collapse to pre-boom levels anytime soon given the volume of work underway or committed. By 2016/17, annual fixed capital investment is forecast to be around $64 billion producing a 5-year average level of investment of $71 billion, which is two-thirds higher than the 5-year average to 2011/12.
Mining production rose 4.4% in 2011/12 to $102 billion (in 2009/10 prices). Annual average growth of 7.3% is forecast to 2016/17, which will lift mining’s share of Australian GDP to 9.1%, making it Australia’s second-largest industry sector. Strongest growth in production over the next 5 years is expected in Western Australia (+50%), New South Wales (+45%) and Queensland (+40%).
According to ABS National Accounts data, employment in the mining sector has doubled since the mid-2000s to almost 250,000 persons. However, BIS Shrapnel suspects this includes a significant number of persons from the construction industry involved in new mine development. Lower levels of construction and increased productivity through the next five years are forecast to see this measure of employment peak at 315,000 persons by 2016 before a decline.
Recent decisions to bring contract mining services back in-house are driving a dip in activity, which will continue over the next few years. Stronger fundamentals and increasing production volumes across a range of commodities will see the value of contract mining rise 20% (to over $12.5 billion) mid-decade from the 2012/13 trough.
Forecast to rise significantly in real terms over the next five years as miners seek to improve operational efficiencies and lift production, maintenance will rise 22% to be a $7.5 billion market while contract maintenance should pick up substantially from 2014/15, and rise 28% over the five years from 2016/17.