What’s next for Australian Resources?

4 min read

It’s buoyant times in the Australian resources industry, with recent data from the government’s official forecaster, the Department of Industry, Innovation and Science (DIIS) highlighting the importance of commodities for the economy.

As global economic growth remains robust, DIIS estimates that Australia’s commodity export earnings will lift from a record high of $226 billion in 2017–18 to $238 billion by 2018–191.

While the nation’s bulk commodities, iron ore, coking (steel-making, or metallurgical) coal and thermal (electricity) coal doing most of the heavy lifting, after $200 billion worth of investment, it’s liquefied natural gas (LNG) that’s stepping up to join them2.

DIIS expects that by 2022-23, LNG will have risen by 70% to $39 billion, overtaking coking coal to become the second biggest commodities earner after iron ore3. However, exports of gold and base metals, in particular, copper, are forecast to grow more modestly over the same period.

Resilient commodity prices are expected to earn more than $1 trillion for the nation over the next four years, says DIIS4 – a figure that is equivalent to almost 60% of gross domestic product (GDP).

The nation’s commodities bounty is also underscored by the rise of newer minerals, as sectors such as electric vehicles, battery technologies and renewable energy create a demand for lithium, cobalt, graphite, vanadium and nickel. Of which, Australia has the reserves, and the industry capability, to be a major player in world markets for these commodities.

Australia retains status as the world’s largest iron ore exporter

Major iron ore miners are set to retain Australia’s status as the world’s largest iron ore exporter with Australia’s iron ore export volumes forecast to increase from 846 million tonnes in 2017–18, to 887 million tonnes in 2019-205. This increase is driven by the ramp-up in production by the largest producers6.

BHP is moving towards its goal of producing 290 million tonnes a year and has projected that its iron ore production will be between 273 million tonnes and 283 million tonnes in the 2019 financial year7. BHP has commenced its US$3.6 billion ($4.9 billion) South Flank iron ore project in the Pilbara region of Western Australia, a mine that the company predicts will be the biggest it has ever built in terms of annual production. With an estimated production of 80 million tonnes of iron ore a year, this would replace production from the ageing Yandi mine.

Rio Tinto says it’s on track to hit the upper end of its 2018 guidance for iron ore shipments from the Pilbara (330 –340 million tonnes), after shipments in the June quarter surged 14% on the same period last year8. Rio Tinto is soon expected to add to its West Angeles and Robe Valley developments by approving its US$2.2 billion ($3 billion) Koodaideri iron ore mine. Koodaideri would support the production of Rio Tinto’s high-grade Pilbara Blend lump product. With both Pilbara Blend and BHP’s Newman lump grades benefiting from China’s crackdown on the environmental impact of its steel production industry. This is due to the high quality of the products allowing the steel mills to retain productivity and cost efficiency while conforming to the anti-pollution measures.

The third of the big three iron ore producers, Fortescue Metals Group, reported a record iron ore shipmentof 46.5 million tonnes in the June quarter9, a 20% increase that allowed the company to comfortably reach the company’s full-year shipment target of 170 million. In May, Fortescue approved its new US$1.3 billion ($1.8 billion) Eliwana iron ore mine, which will allow the company to offer a 60% iron-grade product. So far in its history, Fortescue has produced ore containing about 58% iron compared with 62% minimums from BHP and Rio Tinto. Fortescue earns a lower price for this difference, and the “spread” between the lower and higher-grade iron ore prices has widened significantly in recent years. This has placed pressure on Fortescue to lower its production costs – a challenge the company has continued to meet and one that’s enabled Fortescue to become the lowest-cost producer selling into China.

Coking coal benefiting from economic growth

In general, coking coal has also benefited from China’s economic growth, and from China’s environmental crackdown, because of Australian coking coal’s typically lower impurities. Australian thermal coal has been a surprisingly resilient story. Even with a significant ideological campaign against it in the developed world, thermal coal has almost tripled in price since mid-2016.

Australia’s coking coal export earnings are projected to have reached a record high of $38 billion in 2017–18, up 6.2%10, while DIIS expect volumes to grow from 182 million tonnes in 2017–18 to 200 million tonnes in 2019–20. Driven by high prices, Australia’s thermal coal export earnings are forecast to have reached a record $23 billion in 2017–18. While export values are forecast to decline, as a result of lower prices and broadly flat export volumes, at about 200 million tonnes to $19 billion in 2019–2011.

The big mover in Australian commodities exports is LNG, with 52 million tonnes shipped in 2017-201812, a 41% increase on 2015-16 volumes. DIIS expects LNG exports to reach 77 million tonnes in 2019–20, lifting the value of Australia’s LNG exports from $30.8 billion in 2017–18 to $42.4 billion in 2019–2013.

Surbiton Associates, the independent consulting group specialising in the Australian Gold, Mining and Minerals Industries, released a media release in March this year stating that the gold industry is also performing strongly with Australia remaining the second-largest gold producer in the world. Australian gold mine production in 2017 broke the 300-tonne barrier, resulting in the highest annual output since 1999, according to Melbourne-based mining consultants Surbiton Associates. Total gold mine output in 2017 reached 301 tonnes, or almost 9.7 million ounces, which is an increase of three tonnes from 2016. At the average gold price for 2017, the 301 tonnes was worth almost $16 billion, says Surbiton.

In base metals, Australia remains the third-largest exporter of copper ore and concentrates, the fifth-largest producer of nickel, the third-biggest producer of zinc, the world’s largest producer of bauxite (aluminium ore), the second largest producer of alumina (aluminium oxide) and the biggest exporter of alumina. DIIS expect that Australia’s nickel export earnings will rise from $2.3 billion in 2017–18 to $2.8 billion by 2019–2014, with copper to bring in $8.5 billion in 2017–18, increasing to $11.5 billion by 2019–2015.

Buoyant indications in the niche areas of the Australian commodity roll-call

The nation’s leading mineral sands miner, Iluka Resources, which produces zircon and titanium dioxide ores, reported a 21% surge in revenue in the June 2018 half-year on the back of higher prices for its products16. Rare earths miner, Lynas Corporation (Lynas), is making good on its potential to become a major producer to China of rare earths oxides  and neodymium and praseodymium (NdPr), and an alternative source of these commodities. Lynas mines the ore at Mt. Weld in Western Australia and separates it at its processing facility in Malaysia. According to Melbourne investment firm, Newgate Capital, Lynas is estimated to produce about 24% of the world’s NdPr, and is the only major producer outside China17.

Lynas is just one of the specialised Australian commodity producers for which a highly positive vista is opening up on the back of the growing markets in advanced technology, batteries and renewable energy. A growing band of lithium, cobalt, graphite, vanadium producers and deposit developers are working to become major suppliers of these emerging commodities. Leading this charge are companies such as Galaxy Resources (lithium), Mineral Resources (lithium), Syrah Resources (graphite) and Australian Vanadium (vanadium).

Similar market drivers are also changing the game for established nickel producers, such as Western Areas, which is now tweaking their businesses to produce nickel compounds which go straight to batteries. These newer metals with high-tech exciting markets are adding to the earnings and export potential – and confidence – of Australia’s resources industry.

1. Resources and Energy Quarterly, June 2018, p. ii
2. Australia and the Global LNG Market
3. Resources and Energy Quarterly, March 2018, p. 54
4. Resources and Energy Quarterly, March 2018, p. 1
5. Resources and Energy Quarterly, June 2018, p. 25
6. Resources and Energy Quarterly, June 2018, p. 21
7. BHP Operational Review for the Year Ended 30 June 2018
8. Rio Tinto second quarter operations review
9. June 2018 Quarterly Production Report, Fortescue Metals Group
10. Resources and Energy Quarterly, June 2018, p. 29
11. Resources and Energy Quarterly, June 2018, p. 36
12. Resources and Energy Quarterly, June 2018, p. 42
13. Resources and Energy Quarterly, June 2018, p. 43
14. Resources and Energy Quarterly, June 2018, p. 86
15. Resources and Energy Quarterly, June 2018, p. 86
16. Quarterly Review 30 June 2018, Iluka Resources
17. Newgate Absolute Return Fund research note October 2017

 

Information is current as at 01 August 2018.  This publication has been prepared by Westpac Banking Corporation (ABN 33 007 457 141).  The information provided is factual only and does not constitute financial product advice.  Before acting on it, you should seek independent advice about its appropriateness to your objectives, financial situation and needs.  This article may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. Past performance is not a reliable indicator of future performance.  ã Westpac Group 2018