Mining sector’s hope rests on global growth

The Australian mining division occupies an important place in the nation’s economy and although it is one of the smaller divisions it is the most important exporter.

The division is expected to generate revenue of about $205 billion in 2011-12, up from $138.8 billion in 2006-07 and yielding annualised growth of 8.1%.

Revenue is expected to grow by 7.2% in 2011-12, having already expanded by 20.7% in the previous year as the division rebounded from the global financial crisis.

Mining is expected to generate about 8.0% of Australia’s GDP in 2011-12. Its 2,500 firms employ 243,152 people, paying about $32.9 billion in wages in 2011-12. The division’s net profit is expected to be $59.03 billion this year.

The mining division is heavily export oriented with about $153.1 billion of output (or 74.7% by value) of industry output exported with minimal processing. Most of the remaining output is processed locally by metal products manufacturing industries and is used to generate electricity and provide gas supply. Imports supply about 35% of the domestic demand for mineral products and consist mainly of crude oil.

Trends in the mining division occur at a global level and high and rising prices for a range of commodities over 2003-2007 encouraged resource development worldwide.

The resulting increases in global capacity became available just as the global financial crisis slashed global growth and pushed many developed countries into recession.

In that climate commodity prices fell sharply in the second half of 2008 and early 2009 before recovering strongly as demand rebounded. Oil prices jumped sharply in 2010-11 in response to political turmoil in a number of producing countries and are expected to continue rising in 2011-12.

Rising worldwide production volumes for a range of mineral commodities are expected to cause price growth to slow during the next few years but the overall trend will remain upward.

Higher prices combined with strongly rising output from Australia are expected to support annualised growth in divisional revenue of about 9.1% during the five years through to 2016-17.

By that time industry revenue is expected to be $317.5 billion. Industry profit is expected to grow a little more strongly than revenue as firms reap productivity gains from growing economies of scale.

Profit gains are expected despite the imposition of a Mineral Resource Rent Tax on coal and iron ore, the extension of the existing Petroleum Resource Rent to onshore oil production and output from the North West Shelf Project (replacing royalties in both cases) and the introduction of carbon pricing.

Products and markets segmentation

Coal, oil and gas, metal ore, non-metallic mineral commodities and services to mining are the major products and services provided by the mining division.

Metal ore is expected to account for about 44.4% of division output in 2011-12, with key commodities including iron ore, bauxite, nickel, zinc and copper.

Coal accounts for about 29.2% of the division’s revenue. The segment’s importance has fluctuated considerably, reflecting shifts in coal prices as well as increasing output.

Oil and gas are expected to represent about 19.1% of output in 2011-12, down from 24.5% five years earlier. Although the revenue generated by oil and gas is growing other parts of the mining division, for examplee the iron ore mining industry, have expanded more strongly.

Non-metallic mineral commodities are expected to account for about 2.3% of division revenue with services to mining accounting for the remaining 5%.

Major Players

BHP Billiton Limited accounts for 22% of market share followed by Rio Tinto Plc-Rio Tinto Limited (20%) and Xstrata Holdings Pty Ltd (8.2%).

Industry Outlook

The major factor affecting the performance of the mining division will continue to be the pace of world economic growth, competitiveness of Australian producers and value of the Australian dollar.

The demand for a range of metal and energy products is heavily dependent on trends in world economic growth. Slower growth ultimately reduces the rate at which the demand for minerals expands and holds down mineral prices.

Most minerals Australian produces are exported to markets in the Asia-Pacific region find their way into manufactured goods (metals and a range of other products) destined for other markets, including the developed economies of the European Union, Japan and the United States. As a result, performance is sensitive to economic growth in local markets and also in world economic growth.

Karen Dobie is the general manager of IBISWold. Click here to purchase IBISWorld’s full, report on Australia’s Mining Industry.