This is not a boom or a bust; the Australian mining industry is too complicated for that now.
For 10 years, extraordinary Chinese consumption has delivered national growth scarcely imagined in the years before. But with so much said of resources saving this country from economic oblivion, when the big money slowed, fear took its place.
In August BHP Billiton shelved its $14.7 billion Olympic Dam copper mine expansion in South Australia after mothballing two costly coal mines in central Queensland earlier in the year. Xstrata has hinted its $6 billion coal mine planned for Queensland’s Wandoan could be next. Every other operator is publicly throwing around ambitious plans to cut costs as workers face cancelled contracts or redundancies.
But tidings of bad news don't mean the country's resources sector has sounded its death knell.
For those digging up the goods in those gilded years, the money being made was astonishing. Huge profit margins were celebrated through mundane statements delivered to the Stock Exchange. When everyone is posting record profits, big success is not necessarily big news. Plus, trumpeting record-breaking revenue may lead a minority government to lump you with a big fat new tax.
So where did this boom come from -- the one that lifted the Aussie dollar, wages and regional towns for a decade -- and why did it cool down?
The federal government's Bureau of Resource Energy Economics, expert on all things mining, named it the "millennium mining boom". BREE chief economic and executive director Quentin Grafton explained why after the group released its quarterly statistics in September: from 2002, Australia's resources industry was supercharged by a surge of demand from China and other emerging economies, a spike that was "both the largest and longest since the gold rush of the 1850s", powering the national economy and keeping export prices at "historically high rates" even now.
As rural-dwelling Chinese rushed to cities in the early 2000s, the superpower gorged on Australian resources to supply the roads, infrastructure and energy needed to cater for these arrivals. Aussie exports to China rose in value by 10 times from $5 billion in 2002-03 to roughly $50 billion in 2010-11. Australia just had to hold on.
Thanks to China, from 2002 to 2012:
- Weekly household incomes in Western Australia and the Northern Territory went up 66% and 56% respectively (it was closer to 30% across the rest of the country)
- In 2011-12, 250,000 worked in mining compared to 90,000 almost a decade earlier
- Iron ore prices climbed six times higher, metal-making or metallurgical coal increased five-fold and thermal coal tripled as China used more electricity
- Investment in mine projects or infrastructure went from $12 billion in 2002-3 to more than $82 billion last financial year.
On this final point, BHP Billiton managing director Marius Kloppers said the flood of investment was because miners were struggling to keep up. As he told the Brisbane Mining Club earlier this year:
"After lean years in the '80s and '90s, the coal mining industry had almost no 'investment ready' projects in the pipeline. What eventuated as a result was a substantial supply lag that significantly increased commodity prices, which in turn enticed investment into the industry."
Even with the spectre of a downturn looming, continued construction from that initial rush is still going up -- it's not due to peak until 2014. At current rates, 2016 will still have three times the mining investment of 2002 even if no new commitments are made.
A trio of LNG developments worth more than $50 billion under construction on Curtis Island off Gladstone in Queensland help soften a potentially hard landing for the industry. Australia is slated to eventually overtake Qatar as the world’s lead exporter in LNG, but that industry will not start exporting until 2014. Until that cushioning arrives, it will be iron ore, metallurgical and thermal coal that will be closely watched.
This year, all three tumbled down to prices not seen since the height of the GFC. Copper, aluminium, zinc, nickel and zinc copped a similar flogging. It forced giants like BHP, Rio Tinto, Anglo American and Xstrata to reconsider their spending habits.
Until prices improve, the industry superstars remain cautious about moving projects off the drawing board and into construction. Mining behemoths can no longer count on torrents of cash to justify expansion at any cost. Mining needs to be done cheaper so companies can still score big profits even if overseas buyers are paying less. As Resources Minister Martin Ferguson said in August
"The boom in commodity prices is over. No one can deny it. Just think about it, [metallurgical] coal a short time ago was $320 a tonne, it's now $220 a tonne; iron ore was $180 a tonne, it's now $105; thermal coal was $220 a tonne, it's now $80 a tonne. It was great for a short period of time, I think it will be a long time before we see those record commodity prices again."
This sting of low prices is made worse by the high cost of operating in Australia, or any first-world nation. Higher wages, a national mining tax and a higher royalties charge just imposed in Queensland makes investment in Mozambique or Mongolia appear more lucrative. Miners must weigh savings against the risks of dealing with less stable governments.
Nevertheless, the world’s biggest mining firms are still waiting for China’s demand for Australian resources to properly return so they can start building again.
"A modest slowdown might give Australia a chance to recover from a crippling skills crisis and begin focusing on innovation and productivity."
If Kloppers was right in his Brisbane speech and China grows for the next decade, it means a lot of Australian resources and just as much opportunity. An even stronger outlook emerges when India and other developing Asian nations are included in the forecast. Japan too could prove a wild card as it considers whether to dump its reliance on nuclear power, potentially exchanging it for shipments of Australian gas and coal.
In the slightly longer term, there is comfort in knowing more Chinese are still flowing into urban centres and demanding access to first-world necessities.
Similarly, India's growing middle classes want access to electricity, infrastructure and products once considered luxuries. Indian energy powerhouse GVK is relying on its home country as it develops in Australia through its GVK Hancock joint venture with Gina Rinehart’s Hancock Coal. GVK Hancock's Alpha Project in the Galilee Basin west of Rockhampton will export thermal coal for less than $60 per tonne by building a giant mine, 500km of rail and a coal-loading terminal at Abbot Point on Queensland’s central coast.
In November, GVK Hancock’s chief development officer Justin Crotty told a major projects conference in Brisbane that the firm already had demand to continuously sell 43 million tonnes of thermal coal each year. As other miners wring their hands about low thermal coal prices of between $80 and $90 per tonne, the future Alpha project -- not to mention similar developments from Adani and AMCI -- plan to be profitable in what could be tough times for competitors.
There was more good news around the corner, Crotty said, and not just for GVK Hancock -- he cited research predicting thermal coal would reach $100 a tonne before the end of next year, up from less than $90 in October. Thermal and metallurgical coals are traditionally the last of the commodities to come off the floor, so if these were poised for an increase, so was everything else.
Just minutes before Crotty took the stage, Anglo American metallurgical coal boss John Cleland said Anglo was determined to grow its entire portfolio, including coal, iron ore, nickel, platinum and diamonds:
"It is well understood the current level of excess capacity in the Chinese steel industry has negatively impacted the global steel industry and reduced the level of demand for iron ore and metallurgical coal. It is, however, in the view of Anglo American, that if there is even a modest rate of growth in China and India, there will be renewed momentum in the commodity markets."
Comments from both were well-timed. On the same day, financial analysts HSBC released early figures on Chinese manufacturing showing the first signs of expansion in 13 months. This was confirmed when the final figures were released weeks later, pointing to more good news on the horizon.
The frenzied dash for this country to deliver resources has calmed but demand has not stopped.
A modest slowdown might give Australia a chance to recover from a crippling skills crisis and begin focusing on innovation and productivity. The resources industry will have to produce more, be certain of taxes and ensure infrastructure is able to handle growth. The demand will be there, the prices will likely be solid -- but without the dizzying highs that excited the industry for so long.
From electricity, underground pipes, new buildings, and railway, chunks of Asia will hopefully be built with the help of our exports. As the biggest players keep saying, decisions in mining are not made with day-to-day hiccups in mind, but on decades of forecasts.
At the moment, those decades include millions of people in India and China pulling themselves from poverty with aspirations for everything the first world has been enjoying for a century. And that is going to take a lot of resources.
*Owen Jacques is the chief resources reporter for APN Newsdesk, which publishes across 20 daily newspapers in regional Australia