Miners are living on borrowed time in Australia

Low prospects for growth in Australia and declining commodity prices will likely result in an exodus of mining investment and talent to emerging markets.

Brace yourselves: the miners are going.

Now that I have your attention, I don’t mean that sometime in the next one to three years there will be no mining activity whatsoever in Australia. But if conditions don’t improve for the sector, there’s a real possibility for increased mine closures across the country and a further exodus of mining investment and talent to other emerging markets.

The basis of this observation is the very pessimistic outlook given by 60 leading miners in Newport Consulting’s latest Mining Business Outlook report. Of the leaders interviewed, 93 per cent said that the prospects for growth in the sector over the next one to two years are extremely low or not likely at all. More significantly, 68 per cent cited the following as factors for their pessimism:

1.       Low commodity prices

2.       Low levels of demand

3.       An overly restrictive regulatory and bureaucratic environment.

The major concern is that the resources industry has little control over these factors. They’re responding to the difficult market conditions they face but not saying a lot about what measures they are taking to overcome such challenges.

Any business that needs better prices or more sales in order to survive is on borrowed time, and though the miners are not yet shouting it to anyone who will listen, they are beginning to behave in a similar way.  From the data in the report, as well as my own daily interaction with the mining sector, it’s clear that two major trends are emerging.

Firstly, large investments that take about 10 years to develop are taking longer and are now going overseas. It’s easy to lose sight of this as the event itself is over 10 years away.  Some may dismiss it as the competitive advantage of low-wage economies or lower input costs, both of which are true. But when miners are required to employ hundreds of people to construct buildings to meet the statutory reporting requirements of federal and state governments, which in turn want to head off all those who have suddenly become experts on why fracking is destroying the planet, you can understand a board member looking at the proposal and thinking: “Wouldn’t this go a lot better in Brazil?”

Secondly, many mines, particularly thermal coal, are unprofitable at today’s commodity prices and the outlook for prices to recover is quite low. With the natural gas revolution in the US shifting local energy generation away from coal, US exports of coal have doubled in the past five years, depressing world markets and putting pressure on local producers. 

On top of this, there is the urgent action the Chinese leadership has committed to in order to reduce air pollution in the country’s large industrial cities -- though this is offset by the major investment India is making in coal fired power. These factors have depressed thermal coal prices and there is little optimism they will improve any time soon. There is a real possibility that more than a few mines will close, causing acute pain to regional towns that they support. The ‘take or pay’ contracts that committed miners to set volumes each year are regularly re-negotiated and a reduction in volumes in those transport contracts is likely.

Government regulation and bureaucracy have become impediments to the resources sector to the extent that few politicians are willing to spend political capital supporting mining ventures that vocal opponents get plenty of media time to criticise. The miners are committed to high environmental standards and are willing to change what they do to contribute to the economic and environmental wellbeing of the country and the planet.

But if society takes the view that not having a mining industry is the best way to go, miners have international options and can go elsewhere.

David Hand is the managing director of Newport Consulting.