Despite a depressed global commodities price market, Australia’s iron-ore industry, even at prices of A$60/t to A$70/t, remains lucrative for the most part, says professional services company KPMG Australia head of mining Carl Adams.
“Operations have never needed more people or spent more money. Iron-ore production has risen more than fourfold, from about 160-million tons a year in 2000 to about 700-million tons a year at present,” he points out.
However, Adams says that, while low prices across all commodities persist, Australian mining operations will have to tighten their belts, with some of the smaller marginal operations possibly running into some difficulties. However, he states that the mining production boom has significantly “raised the baseline level of economic activity in Australia”, which he suspects will continue.
“The resources industry in Australia has experienced a once-in-a-generation change in the last 15 years and the industry is now dramatically larger than it once was. The froth of the mining construction boom is quickly subsiding, however, and the industry, as a whole, will need to take every opportunity to do more with less while it waits for the next wave of global development,” Adams says.
He points out that ongoing urbanisation and the economic growth of Asia will drive energy consumption, of which liquefied natural gas (LNG) and coal will be a significant mix. “Australia has built a world-class LNG and coal sector that few countries will be able to replicate in the short to medium term.”
Further, Adams highlights that Asia’s continuing increased appetite for steel, brought about by growing urbanisation, will promote the demand for the next phase of metals, such as aluminium and copper. In the long term, Australia is also well positioned to take advantage of an Indian transformation that will be analogous to that seen in China.
“For most of the last decade, extremely high prices have rewarded those mining companies which focused on driving volume at all costs. More recently, there has been a period of persistently high prices, where cost control started to come into focus, but prices were still high enough to hide a multitude of sins. The industry is now focused on lowering production costs,” he highlights.
Adams adds that the Australian government has also benefited from capital investment, royalties, increased jobs and higher tax receipts.
However, the dropping commodities prices have made the resources sector an easy “scapegoat” for explaining governments’ budget deficits, as it seeks to cover the increasing costs of areas including health and education.
He warns that decreasing exploration spend by major and junior miners alike is an area of concern; however, “contrarian investors prepared to take risks could find great value in the Australian resources market”.
Meanwhile, Adams suggests that resources sector employers will face the more difficult changes. “Over the last ten years, a culture of entitlement has developed. Rosters have become lighter, pay higher and unemployment has been extremely low.”
He adds that, in the next few years, organisations across Australia will be forced to find ways of obtaining more output for every dollar paid to employees, which will force people to adapt, but not before “a period of friction”, subsequent to the realisation for changing employment arrangements.