JULY 2016 MINING, OIL AND GASINFORMER

PREPARED FOR MEMBERS• Current performance• Sector forecast• Opportunities

PROFESSIONALS AUSTRALIAMINING, OIL AND GAS INFORMER JULY 2016

Australia’s mining, oil and gas sector is a major employer of technical professionals. Engineers and scientists are involved in all phases of production, including exploration, construction, extraction and mining. The construction phase typically provides a range of opportunities for technical professionals, as major investment is made to bring new projects to fruition.

While the number of unskilled employees tends to decline as mines move into the output phase, positions for skilled employees tend to be more resilient, with technical professionals required to constantly monitor operations. As a result, the mining, oil and gas sector will continue to provide opportunities for technical professionals over the years ahead.

Overview

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Summary Australia’s mining, oil and gas sector has driven massive economic growth across the nation over the past decade. The mining boom saw revenue and employment in the sector grow significantly, providing a raft of opportunities for engineers and technical professionals. High commodity prices provided a major stimulus for local businesses, encouraging miners to rapidly increase their investment in local mining operations. The vast majority of Australia’s mined goods are exported, and the fate of the sector is tightly bound to commodity prices, with high prices driving investment and revenue growth.

Conversely, low and declining prices have the potential to rapidly pull revenue out of the industry, as returns from investment decline.

With commodity prices declining strongly since 2012, the industry has shifted away from an investment and construction boom, towards a boom in output volumes, with miners seeking to maximise the return on their sunk investment. While employment across the industry is highest during the construction phase, skilled engineers and technical professionals remain very much in demand as mining continues.

Figure 1: Mining sector segmentation

Source: IBISWorld Industry Report B – Mining in Australia

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Current performanceThe mining, oil and gas sector in Australia has fluctuated over the past five years, with a prolonged boom followed by a rapid correction. The mining boom has been widely credited with steering the economy through the global financial crisis, delivering growth during a period when most economies were staring down the barrel of recession. However, more recently, easing commodity prices have funnelled new investment away from the industry, with ongoing revenue stemming from existing mines rather than new operations.

Overall, sector revenue has declined by an annualised 4.0% since 2011-12, with revenue falling from $219.2 billion to $185.7 billion in 2015-16. Some secto rs were more affected by the boom than others, with iron ore rising and falling rapidly off the back of demand from China. Conversely, oil and gas extraction has been less volatile, with demand increasing mildly and employment trending steadily upwards over the past five years. Solid exports of oil and gas are likely to provide a source of ongoing growth for the sector, with exports responsible for almost three quarters of production.

Figure 2: Mining sector revenue in Australia

Source: IBISWorld Industry Report B – Mining in Australia

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Employment

Employment in the mining, oil and gas sector has declined from the highs reached during the peak of the mining boom. However, while the overall level of employment has trended downwards, employment in some industries has been more resilient. Additionally, much of the reduction in employment across the sector has come in the form of lower unskilled labour levels. During the construction phase of mining, the employment of unskilled labour is particularly high, owing to the labour-intensive nature of construction. The recent mining boom was effectively a construction boom, causing both skilled and unskilled employment numbers to rise rapidly. However, as the boom has subsided, positions for skilled technical professionals have remained. While growth in new positions has slowed significantly, opportunities in the sector remain.

Employment in coal mining has weakened over the past five years, with mine closures and layoffs weighing heavily on the industry. However, while employees in coal mining will continue to face some challenges, much of the worst has likely passed, with industry employment expected to settle over the coming years. Ongoing demand for exported coal will support employment as miners seek to take advantage of the need for energy in high-consuming economies across Asia.

Employment in iron ore has also eased more recently, after rapid growth leading up to the boom. While employment has fallen by some 9% from its peak in 2013-14, overall employee numbers remain up by 12% over the past five years, and almost three times the number employed a decade ago. This indicates that opportunities will continue to be present for technical professionals over the years ahead, as the industry has largely transitioned to a focus on output rather than new construction.

In recent years, the greatest opportunities for employment in the sector have come from oil and gas extraction, with the industry continuing to invest in new capacity and export facilities. While other industries in mining have rationalised their employee numbers, oil and gas continues to expand, providing ongoing opportunities for technical professionals.

Employment in oil and gas extraction has increased by almost 64% over the past five years, including growth of 3.3% over the past year. While this growth is expected to settle slightly, the industry will continue to provide the brightest signs for employment in the wider mining, oil and gas sector. The growth of oil and gas extraction locally will also provide continued support for downstream industries including petroleum refining, petroleum fuel manufacturing and exporters, ensuring ongoing employment opportunities in these industries.

Figure 3: Mining, oil and gas employment

Source: IBISWorld Industry Reports B0601, B0700 & B0801

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Commodity prices

Commodity prices have put a dampener on the sector more recently, with miners receiving lower prices for their mined goods. While high prices fuelled the boom, the subsequent decline has seen revenue fall. With a lower return on commodities - particularly iron ore - new investment in the industry has slowed. Weaker demand growth from China and a higher global supply have been the major contributors to declining commodity prices, and little change is expected over the near term.

Much has been made in the media of the weakening mining sector. However, while prices in the sector are expected to remain around their current level over the near term, the industry is still very profitable. Most miners have increased their volumes in an effort to bolster revenue, with only modest increases in cost associated with additional output. Most of the costs associated with running a mine are sunk in the initial construction phase, with daily operation accounting for a much smaller portion of expenses.

Declining oil prices have also impacted upon oil and gas extraction businesses, however declining exchange rates have softened the fall.

The industry has also invested heavily in establishing new export markets, particularly in liquefied natural gas (LNG). While the world oil prices and the price of LNG are currently low by historical standards and are expected to remain low over the year ahead, growth in exports will demand stronger production. As a result, both industry revenue and employment levels in oil and gas extraction are expected to swell over the years ahead.

Figure 4: Index of commodity prices

Source: Reserve Bank of Australia, Statistical Tables, Commodity prices

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Outlook

The outlook for the mining, oil and gas sector remains quite positive, as operators come to terms with new conditions in the sector. While the past five years have been characterised by shifting terms of trade, commodity prices have little further room to move. As prices settle into the new normal, businesses will be able to reduce their focus on cost reduction, and return to their attention to optimising core business operations. While any major shift in commodity prices is unlikely, movements in the exchange rate remain a possibility. The most likely out-come, and indeed the outcome being forecast by some economists is a further fall in the Australian dollar. This would provide a major boost for the industry, effectively increasing the return that Australian exporters receive for their goods. Any increase in profitability is likely to feed through to stronger employment, as miners seek to take advantage of favourable conditions.

AsiaAustralia’s resources sector is heavily reliant on ongoing demand from Asia, particularly China and Japan. Iron ore mining in Australia is heavily focussed on export markets, with over 92% of the product exported abroad. Of this total export volume, over 77% went to China in 2015-16¹, highlighting the industry’s major reliance on growth from China. Iron ore is primarily used in the production of steel, and steel is most in demand when a country is rapidly growing and industrialising. While much of the past decade has seen double-digit growth from China, these figures have eased significantly. However, China’s economy continues to expand at among the fastest rates in the world, indicating that demand for iron ore will continue.

While most of Australia’s major mined commodities are undoubtedly reliant on the economic fortunes of China, Japan also provides a key source of demand, particularly when it comes to energy production. Despite its size, Japan is the largest global importer of LNG, and is also Australia’s largest importer of black coal. Strong exports to Japan

were strengthened by the Fukushima nuclear disaster in Japan during 2010-11, with fossil fuels filling the gap as nuclear power declined. While demand from Japan is unlikely to grow significantly, Japan’s steady economy will continue to provide a major source of demand for Australia exports over the years ahead.

¹ IBISWorld Industry Report B0801, Iron Ore Mining in Australia

Figure 5: Mining, oil and gas revenue

Source: IBISWorld Industry Reports B0601, B0700 & B0801

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Liquefied natural gas

LNG exports are poised to provide a key area of growth for the local industry over the years ahead. Export markets for Australian LNG have grown rapidly over the past decade, with Western Australia and the Northern Territory dominating the market. More recently, Queensland has invested heavily in new export facilities, providing fresh opportunities for the sector to export. In 2015, Australia exported $16.5 billion of LNG, with the vast majority of supply heading to countries throughout Asia. Natural gas is becoming increasingly popular throughout Asia as an alternative energy source to carbon-emitting fossil fuels such as coal. LNG now accounts for about a quarter of global energy consumption².

While growth in exports is expected to drive greater production and exports over the years ahead, easing commodity prices will limit the resulting windfall. Spot prices for natural gas have trended downwards in recent years as the glob-al supply has increased. The rising prevalence of renewable energy has also placed downward pressure on LNG, with some users choosing to utilise wind or solar energy in place of coal and gas. However, gas remains an integral piece of the energy mix, benefiting from its ability to rapidly respond to changes in demand. While coal power requires a long start-up times and wind and solar depend upon natural forces, energy production from gas power stations can be quickly adjusted to order to respond during peak periods, preventing energy shortages.

While the industry faces some challenges, overall growth in local production will see Australia become one of the world’s largest exporters of LNG over the coming years, providing a range of opportunities for technical professionals in the local industry and related downstream industries.

Opportunities• LNG: Liquefied natural gas remains the

brightest spark in the sector, with rapid export growth fuelling opportunities in the sector. With Australian producers aiming to become the largest exporters of LNG over the next five years, the number of opportunities in the industry is likely to expand.

• China: While much of the media coverage surrounding China has focussed on a slowdown in growth, current growth rates remain quite strong. As the Chinese economy continues to expand, demand for mined goods for construction and energy generation is likely to remain robust.

• Exchange rates: Declining commodity prices have placed downward pressure on the sector over the past five years. However, the falling Aussie dollar has provided much needed support, effectively reducing the price of Australian exports. Some economists have forecast further falls over the years ahead, presenting further opportunities for export growth.

² Natasha Cassidy and Mitch Kosev, Reserve Bank of Australia, Australia and the global LNG market, March 2015 9

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