A PROFESSIONALS AUSTRALIA INDUSTRY NEWSLETTERINFORMER

IN THIS ISSUE• Project Summaries • Resources Industry Outlook

Resources

Issue Three

SummaryThe ascension of China and India and associated rising commodity prices has been a boon for Australia’s resources sector and for many Australian workers, particularly those willing to relocate or work under fly-in-fly-out (FIFO) arrangements.

The sector has received a massive injection of capital in the past decade. This stream of investment has flowed through exploration, mining services and construction and is now making its way into production and output as so many projects reach completion. Jobs opportunities remain, especially in the resource rich states, but now they are less to do with construction and more to do with operations.

OverviewFor the purposes of this report, the resources sector is comprised of metal ore mining (iron ore; copper; gold; silver, lead and zinc; and bauxite, nickel and other metal ores), non-metallic mineral mining and quarrying (mineral sands, uranium, manganese, gravel, rock, limestone, clay, diamonds, gemstones, salt and other minerals) and exploration and other mining support services (in-house mineral exploration services, and mining services provided by specialists). Please refer to our Energy issue of The Informer for the outlook on coal, oil and gas.

Australia’s resources sector benefits from vast, high quality reserves that are easy to extract and this makes our industry highly competitive in global markets—exports accounted for 70 per cent of total resources revenue in 2013-14. In particular, the sector has boomed in the past decade because of rapid economic growth in China and the associated demand for iron ore, 95 per cent of which is mined for export.

Mining remains the biggest contributor to Australia’s GDP and employs 265,000 people as at the June quarter 2014.

Export marketsAustralia’s mineral commodities make up the majority of national export income. The foremost exports are iron ore, black coal, bauxite, lead, mineral sands, alumina, uranium, aluminium and gold. Iron ore is Australia’s primary export commodity and its largest markets are China, Japan, South Korea and Taiwan. Western Europe accounts for a smaller, but significant share of mineral exports.

Domestic marketThe main domestic industries dependent on Australia’s resources sector for raw materials are the construction industry and the mining industry itself which, in the past five years, has undergone a massive expansion and boom in construction activity. Another major component of the boom has been strong domestic demand for Australia’s mining support services and exploration industries.

The local resources market also includes supply to the declining metal product manufacturing industry which is losing ground to overseas producers, especially to Chinese produced steel.

Despite being a major international producer of many mineral commodities, Australia relies on imports to satisfy demand for some commodities, for instance, aluminium. IBIS World suggests that imports satisfied 38.5 per cent of domestic aluminium demand in 2013-14.

Where the jobs areNo matter which way you look at it, the sector is concentrated in three states—Western Australia, Queensland and New South Wales.

Enterprises

Figure 1: Resources sector geographic concentration

WA QLD NSW OTHER STATES & TERRITORIES

Resources Industry Outlook

36.8%

24.4%

19.7%

19.1%

Employment

Salaries & Wages

Figure 1: Resources sector geographic concentration (cont’d)

Figure 2: Resources organisations and population by state/territory

WA

WA

Population

QLD

QLD

NSW

NSW

Resources Organisations

OTHER STATES & TERRITORIES

OTHER STATES & TERRITORIES

40.6%

46.6%

29.2%

26.9%

17.3%

15.6%

12.9%

10.9%

Western Australia hosts the largest share of resources industry organisations, growing to 36.8 per cent over the past few years, reflecting the state’s importance in the sector and accounting for the legendary mass exodus of skilled workers from the eastern states to the west during the height of the boom. The other resource-rich states, Queensland and New South Wales, are home to about 24.4 per cent and 19.7 per cent respectively.

Top occupations in the sector according to the Australian Government’s Resources Sector Jobs Board are engineering and maintenance, operations, exploration and geoscience, health safety and environment, processing, and management. The vast majority of positions in the industry are in the locations where minerals are found, as shown in Figure 3.

ABS data suggests that the breakdown of mining jobs (excluding exploration and mining support services) during 2012-13 was Western Australia, 41.6 per cent (59,608 people), Queensland, 29.2 per cent (41,844 people) and New South Wales, 17.3 per cent (24,748 people). The breakdown of salaries and wages was Western Australia, 46.6 per cent ($9.7 billion), Queensland 26.9 per cent ($5.6 billion) and New South Wales, 15.6 per cent ($3.2 billion).

While resources projects exist in the other states, there are fewer mining organisations based outside of the big three. Victoria’s resources make up about 10.1 per cent of the total, including gold and energy commodities. South Australia’s share has expanded to 6.1 per cent over the past few years, because of growth in uranium, copper (despite scrapped plans for a $30 billion expansion of Olympic Dam in 2012), gold and iron ore. The Northern Territory (1.2 per cent) and Tasmania (1.5 per cent) extract mainly metallic minerals.

This concentration of work in remote locations has necessitated a FIFO workforce, especially during the past several years. But some are campaigning for an end to the practice, for instance former WA Nationals Leader, Brendan Grylls, who endorses increased government support to develop towns in the Pilbara to accommodate miner’s families, and a growing number of families of workers suffering the effects of depression and suicide while living a FIFO lifestyle who are calling for a culture change in FIFO camps.

Source: Compiled from IBIS, and ABS data

Source: IBIS World

Figure 3: significant minerals resources projects at the committed stage (April 2014)

Western Australia• Burrup ammonium nitrate • Iron Bridge iron ore • Mine of the future iron ore • WAIO Nelson Point iron ore • WAIO optimisation iron ore • Horizon 1 iron ore • Mt Webber iron ore • Iron Valley iron ore • Roy Hill iron ore • Keysbrook zircon

Queensland• Rocklands copper• Dugald River zinc• Lady Loretta zinc• Charters Towers gold• Port of Townsville copper

New South Wales• Hera gold• Woodlawn zinc-copper

Source: BREE

Employers Just four enterprises in the sector account for around 40 per cent of total revenue. Concentration is even higher in iron ore extraction which requires large-scale operations and is intense in Western Australia. The biggest operators include BHP Billiton, Rio Tinto and Xstrata Holdings. However, joint ventures are common on large projects and smaller operators have proliferated in the past five years—growing in number by 1.5 per cent per year. A significant smaller player is the Fortescue Metals Group, with 2.9 per cent of market share.

Current Performance Industrialisation in developing countries, China and India in particular, has led to rising prices, rapid expansion and increased employment in the sector over the past 10 years.

The value of committed resources projects came off its peak of $268 billion in April 2013 to $229 billion at the end of April 2014. Nevertheless, the Australian resources sector is still experiencing increased capacity and output. Revenue grew at an average 4.9 per cent per year between 2009-10 and 2013-14 and then grew by 15.1 per cent in 2013-14 alone.

But the rush to capitalise on China’s boom has resulted in an oversupply and lower prices. In an effort to reduce costs, many operators are now insourcing jobs instead of hiring contractors and as a result, employees are being laid off in the mining services support part of the industry.

Despite this change in arrangements, employment in the sector as a whole has risen slightly (by 1.6 per cent in the year to June 2014) but is now lower (by 2.4 per cent) than it was in the previous quarter. According to the ABS, gross operating profits in the sector fell by 15.2 per cent (seasonally adjusted) in June 2014 while wages and salaries rose 3.3 per cent.

Despite this change in arrangements, employment in the sector as a whole has risen slightly (by 1.6 per cent in the year to June 2014) but is now lower (by 2.4 per cent) than it was in the previous quarter. According to the ABS, gross operating profits in the sector fell by 15.2 per cent (seasonally adjusted) in June 2014 while wages and salaries rose 3.3 per cent.

Notwithstanding this volatility, global demand remains strong and for most commodities is still growing. For example, against expectations, China’s National Bureau of Statistics reported a 7 per cent rise in iron ore imports in the year to September 2014.

The Project Pipeline The number of committed projects continued to decrease between October 2013 and April 2014. Although the value of new committed projects increased, it was not by enough to offset the large volume of projects that have moved from the construction phase to the production phase. The surge in investment over the past five years has led to an abundance of high-value projects being completed and entering their production phase. In particular, seven iron ore projects worth $16.7 billion in total were completed in 2013-14 (Table 1).

Another indicator of the decline in new projects is the measure for quantifying exploration activity, meters drilled, which fell 4.9 per cent in the June quarter 2014, 19.5 per cent lower than in the June quarter 2013.

*Maximum investment

Aluminium, Bauxite, Alumina

Copper

Gold

Infrastructure

Iron ore

Lead, Zinc, Silver

Nickel

Uranium

Other commodities

Total

2

5

8

12

13

–

3

5

9

57

2

8

13

14

20

3

7

2

22

91

–

2

2

9

5

4

–

–

2

24

–

–

1

3

7

1

–

1

2

15

500

7873

1740

25,900

29,839

–

3000

3500

2876

75,228

1650

3154

2451

24,777

28,748

487

5243

575

8003

75,088

–

343

320

9511

11,928

2389

–

–

845

25,336

–

–

116

2510

16,731

58

–

98

720

20,233

No. No. No. No.$m* $m $m $m

Publiclyannounced

Feasibility Committed Completed

Aluminium, Bauxite, Alumina

Copper

Gold

Infrastructure

Iron ore

Lead, Zinc, Silver

Nickel

Uranium

Other commodities

Total

–

1

9

1

16

1

6

2

5

41

2

3

1

8

–

–

1

–

6

21

–

1

2

3

1

2

–

–

3

12

–

2

–

2

2

–

–

–

1

7

–

1

–

–

–

–

–

–

4

5

–

–

–

–

–

–

–

–

1

1

–

–

1

–

1

–

–

–

1

3

2

8

13

14

20

3

7

2

21

90

WA QLD NSW SA VIC TAS NT TOTALS

Source: BREE

Table 2: Feasibility stage project summary by state/territory (April 2014)

Table 1: Project summary (April 2014)

Employment and wages IBIS World observes that the mining industry typically enjoys high labour productivity, but that this has not been so in the past few years as labour shortages push up wages and other input costs. IBIS points to an annual increase in wages and salaries of 19.4 per cent between 2009-10 and 2013-14 even as new mines entered the production stage. Total wages in the sector accounted for 12.6 per cent of revenue in 2013-14.

Exploration and construction are more labour-intensive than production at established sites and employment in the sector is expected to level off in the short term (Table 3).

According to the latest available ABS data, employment fell in most segments of the mining industry between 2011-12 and 2012-13. The exception is iron ore mining which employed 2869 additional people—a 10.6 per cent increase.

During 2012-13, non-metallic mining employment fell to 12,745 people, a decline of 4.3 per cent. Wages and salaries dropped 2.8 per cent to $989 million in the same period.

Table 3: Mining operations employment, short-term trend

Table 4: Metal ore mining performance

Metal ore mining

Employment at end June

Wages & salaries ($m)

Sales & service income ($m)

Total income ($m)

Total expenses ($m)

Operating profit beforetax (OPBT) ($m)

Industry value added (IVA) ($m)

Earnings before interest, tax, depreciation and amortisation (EBITDA) ($m)

68,754

68,754

101,843

107,316

58,454

50,616

70,371

54,584

8,208

68,536

92,821

92,739

64,103

29,671

58,862

40,542

9,835

-0.3

-8.9

-13.6

9.7

-41.4

-16.4

-25.7

19.8

68,536 -0.3

13,315 12,745 -4.3

48,822 46,350 -5.1

Non-metallic mineralmining and quarrying

Exploration and othermining support services

2011–12

2011–12

2012–13

2012–13

% change

% change

Source: ABS, 8415.0 – Mining Operations, Australia 2012-13

Source: ABS, 8415.0 – Mining Operations, Australia 2012-13

Between 2011-12 and 2012-13, employment in exploration and other mining support services fell to 46,350 people, a decline of 5.1 per cent. Wages and salaries rose 2 per cent to $4.9 billion in the same period.

Table 5: Non-metallic mineral mining and quarrying performance

Table 5: Non-metallic mineral mining and quarrying performance

Employment at end June

Employment at end June

Wages & salaries ($m)

Wages & salaries ($m)

Sales & service income ($m)

Sales & service income ($m)

Total income ($m)

Total income ($m)

Total expenses ($m)

Total expenses ($m)

Operating profit beforetax (OPBT) ($m)

Operating profit beforetax (OPBT) ($m)

Industry value added (IVA) ($m)

Industry value added (IVA) ($m)

Earnings before interest, tax, depreciation and amortisation (EBITDA) ($m)

Earnings before interest, tax, depreciation and amortisation (EBITDA) ($m)

13,315

48,822

6,038

15,936

5,516

16,910

5,999

18,016

-367

-894

2,079

6,732

681

-28

1,018

4,814

12,745

46,350

5,797

15,189

5,374

14,951

5,732

17,997

-313

-2,783

2,625

6,366

1,172

-540

989

4,911

-4.3

-5.1

-4.0

-4.7

-2.6

-11.6

-4.4

-0.1

-14.8

211.2

26.2

-5.4

72.1

1,859.0

-2.8

2.0

2011–12

2011–12

2012–13

2012–13

% change

% change

Source: ABS, 8415.0 – Mining Operations, Australia 2012-13

Source: ABS, 8415.0 – Mining Operations, Australia 2012-13

Skills shortages no longer a problem for employers The government Survey of Employers who have Recently Advertised (SERA) reveals that skills shortages are not a current feature of the Australian labour market and resource-related occupations are now among the easiest to fill. The survey reports large numbers of applicants competing for the available positions. In 2013-14, there were 35.7 applicants for each vacancy in resource-related professional occupations compared with a 19.6 average for all professions. Of these, 27.0 applicants were qualified and 5.7 were suitable compared with averages for all professions of 16.3 and 3.0 respectively.

World price of iron ore and weakening Aussie dollar Stories about the value of the Australian dollar and iron ore appear in the pages of our major newspapers almost daily, highlighting the importance of the commodity to our overall economy and the significance of the value of the dollar to Australia’s minerals trade. The relationship between iron or prices and the value of the Australian dollar is a complex one that needs to be acknowledged in any analysis of the sector.

A number of factors come into play, including that ‘as the division shifts focus to production, the interplay between global demand, the cost structure of Australian producers and the value of the Australian dollar will determine performance’ and ‘a weaker Australian dollar favours local producers’ (IBIS World) and the dollar ‘needs to go down when the terms of trade and investment are declining, just as it went up when the terms of trade and investment were rising’ (RBA deputy governor, Phillip Lowe).

Because minerals prices are set in US dollars, unanticipated movements in the value of our currency against the greenback can also affect miners’ revenues in the short term.

Global iron ore prices have been volatile over the past five years and prices have slumped 40 per cent since the beginning of 2014 because of a glut in supply. By mid-November they had fallen to $US69.58 a dry metric ton—the lowest price since June 2009. In the same period, the Australian dollar weakened against the greenback.

The outlookThe Bureau of Resources and Energy Economics (BREE) forecasts subdued resources investment in the short term despite recent government initiatives to streamline the project approvals process. Added to this are delays to projects in the investment pipeline because of declining market conditions. The number of projects at the publicly announced stage was 14 lower at the end of April 2014 than it was at the end of October 2013 and the number of Feasibility Stage projects was by down 18 in the same period.

However, BREE suggests opportunities for further investment remain, as demonstrated by the number of projects announced and being studied for feasibility. And the up side of the investment peak is substantial increases in annual production capacity, including 215 million tonnes of iron ore. BREE reassures workers with the news that while the investment phase lasted for around five years, the output phase will last for decades and deliver ongoing economic benefits like employment, royalties and ongoing operating expenditure in Australia.

But pressure on salaries and wages looks set to get tougher as producers struggle to compete in a tight global market with soft commodity prices. Former Rio Tinto director, Sir Rod Eddington, points out that the big miners are ‘focussing on efficiency and that’s a sign they’re not banking on prices’.

Medium termIn the medium term, reduced investment in the sector will lead to lower levels of employment in construction but new opportunities in production. BREE expects increased demand for commodities and slowing supply growth from reduced investment to support higher prices.

IBIS forecasts compound growth of 6.2 per cent each year until 2018-19 including further expansion of mining activity in Western Australian iron ore production. On the other hand, exploration and mining services revenue is expected to continue to decline and mining capital expenditure is forecast to peak in 2014-15.

Over the next five years, significant investments in capacity will come on-stream. Despite some volatility, total economic output is expected to continue increasing as is mining’s contribution to the economy through direct employment.

Long termBREE reminds us that mining investment has come down from a very high peak and that it is cyclical in nature. Australia still has many high-quality mineral deposits that can be developed when the economic cycle rebounds.

Figure 4: Medium-term employment projections (jobs, growth and wages)

Source: BREE

Employment (‘000)

Employment growth (%)

Average wage ($’000)

In addition, efficiencies are expected to be gained through employing newer technologies, such as heap leaching (a series of chemical reactions that absorb specific minerals and then separate them from other materials) in copper and gold mining.

Recent newsThe following news stories give some indication as to where the sector is heading in the long term. China and India look certain to keep the resources sector active for a long time to come.

Australia-China free trade agreementIn summary, the China-Australia free trade agreement will remove tariffs on ‘all resources products within two years’ and in particular, ‘transformed resources products, such as refined copper and alloys (unwrought) (currently subject to 1 and 2 per cent tariffs), aluminium oxide (alumina) (8 per cent), nickel mattes and oxides (3 per cent), unwrought zinc (3 per cent), copper waste and scrap (1.5 per cent), unwrought aluminium (5 and 7 per cent tariffs), aluminium waste and scrap (1.5 per cent), unwrought nickel (3 per cent), other mineral substances (3 and 5 per cent tariffs), and titanium dioxide (6.5 and 10 per cent tariffs)—many upon the Agreement entering into force’ (DFAT).

The agreement also ‘locks in zero tariffs on iron ore and gold, improves the transparency of non-tariff measures and preserves full access for Australian producers to trade remedies available under the WTO, including anti-dumping and countervailing measures’.

New plans for Olympic Dam expansionBHP Billiton announced in November that it will double the size of the Olympic Dam copper mine over the next 10 years. New capacity will come from underground mining instead of the open-pit approach that was scrapped in 2012. The first stage will inject $US200 million to increase production by one third by 2018.

About 3500 people are currently employed at Olympic Dam and BHP has not yet made an undertaking on how many new jobs will be created as a result of this project apart from saying that the number would be ‘considerable’.

Nuclear cooperation agreement with IndiaThe signing of a Civil Nuclear Cooperation Agreement between India and Australia in September 2014 will enable Australia to resume selling uranium to India.

The move comes following the Gillard Government lifting a long-standing ban in 2011. (Australia had initiated the South Pacific Nuclear Free Zone treaty, which prevented members from selling uranium to India on the basis that it did not accept full-scope nuclear safeguards in 1986).

Australia has nearly one-third of the world’s known economic uranium resources and the agreement provides an opportunity for growth in the Australian uranium mining and exploration industry. In response to the signing, New South Wales also announced that six companies have been invited to apply for a Uranium Exploration Licence in New South Wales, opening up a new avenue of supply.

It is likely to be several years before any actual uranium sales to India take place but India plans to boost its nuclear power output from 4 per cent now to 25 per cent in 2050, presenting Australia with long term prospects of becoming a key supplier.

SourcesIBISWorld Industry Report B, Mining in Australia, April 2014

http://www.amec.org.au/news/media-releases/mining-sector-integral-to-the-economy

http://www.abs.gov.au/ausstats/abs@.nsf/PrintAllPreparePage?

http://www.abs.gov.au/AUSSTATS/abs@.nsf/Latestproducts/5676.0Main%20Features2Jun%20

http://www.bree.gov.au/publications/resources-and-energy-quarterly

http://www.bree.gov.au/publications/resources-and-energy-major-projects

http://www.bree.gov.au/files/files//publications/remp/remp-2014-04.pdf

http://docs.employment.gov.au/system/files/doc/other/skillshortagesaustralia2013_14_0.pdf

http://jobsearch.gov.au/resourcesectorjobs/

http://www.adelaidenow.com.au/business/bhp-billiton-to-double-olympic-dam-mine-in-economic-jobs-boom-for-sa/story-fni6uma6-1227133607240

http://www.theage.com.au/business/mining-and-resources/marubeni-expects-iron-ore-prices-to-climb-in-2015-20141014-115s3b.html (print version which contained more content)

http://www.smh.com.au/business/markets/currencies/australian-dollar-slumps-on-rba-speech-iron-ore-20141126-11txnt.html#ixzz3KEEMdEUd

http://www.amec.org.au/news/media-releases

http://dfat.gov.au/fta/chafta/fact-sheets/key-outcomes.html

https://www.mapw.org.au/files/downloads/ICAN-UraniumIndia.pdf

http://www.abc.net.au/news/2014-09-04/abbott-heads-to-india-with-plans-to-sign-uranium-deal/5718500

http://www.perthnow.com.au/news/western-australia/fifo-culture-has-workers-afraid-to-take-depression-medication/story-fnhocxo3-1227137049357?nk=3031186102b21f2073562937ab918c58

A PROFESSIONALS AUSTRALIA INDUSTRY BRIEFINGINFORMER

CONTACTProfessionals Australia (formerly APESMA) Lvl 3, 163 Eastern Rd, South Melbourne, VIC 3205

info@ProfessionalsAustralia.org.au

ProfessionalsAustralia.org.au

Phone 1300 273 762

Resources

Issue Three