Gemma Daley and John Kehoe
An explosion in costs means Australia’s standing as a viable coal, iron ore and base metals producer is under serious threat, jeopardising $121 billion a year in resources revenue in the next two decades.
This is the conclusion of a landmark report prepared for the Minerals Council of Australia, which also warns that key policies and regulations will make it hard for the mining industry to maintain current production during a period of lower commodity prices.
The report’s author, Port Jackson Partners, argues high resource wages and productivity declines mean Australia has lost its competitive advantage over emerging miners in Africa, Asia and South America.
“Large market share gains over earlier decades have been replaced by stagnation or share losses – we have lost our competitive edge,” says the report, which calls for a suite of policy reforms to help increase the volume of mineral exports to protect market share and capture future investment and revenue. It found that more than half of Australia’s coal, coking coal, copper and nickel mines have costs above global averages, and the nation has lost its iron ore cost advantage for all but Pilbara projects established before 2008. Labour costs are a key driver, with a shortage in critical trades and an unworkable industrial relations regime producing wages that are not only among the highest in the world but are also growing at a faster pace, the report said.
It follows repeated warnings from BHP Billiton chairman Jac Nasser, who said last week the commodity price cycle had passed its peak and Australia must get its rising cost base under control.
The BHP Billiton Mitsubishi Alliance and Xstrata Coal last week said they would cut a combined 900 jobs partly because of rising costs, following job cuts at the Queensland operations of Rio Tinto, Anglo American and Ensham Resources. The largest single loss of jobs was when BMA, which has been the subject of a long-running industrial dispute, closed its Norwich Park mine in May, affecting 1400 employees and contractors. BHP has also put on hold a $20 billion expansion of its Olympic Dam copper, uranium and gold mine in South Australia.
Capital costs are also rising at a faster pace, making thermal coal projects 66 per cent more expensive and iron ore projects 30 per cent higher than the global average.
The majority of the thermal coal pipeline is at risk, there are few prospects for growth in aluminium, where China and India enjoy a cost advantage of up to 80 per cent, and copper and nickel projects are under “great pressure”, the report says, as new and strong rival countries have emerged.
“The easy assumption that we will be a competitive minerals supplier and location of choice for new investment because of our natural endowment can no longer be sustained,” the report notes.
The sector has relied heavily on record prices to deliver windfall revenue gains in the past five years, with price rises contributing $44 billion of the $93 billion in minerals revenue growth between 2006 and 2011.
However, with the terms of trade – export prices relative to import prices – now falling, future returns will depend on increasing the volume of commodity exports, to take advantage of strong demand from industrialising economies, including China and India, South-East Asia and Africa. The vision for a price led boom being replaced by an export volumes story is broadly consistent with the views espoused by the Reserve Bank of Australia and Treasury.
The report argues this means there needs to be a major policy rethink to save the economic opportunity – including a shift to ensure the benefits continue by slashing regulations, reducing labour and capital costs, mobilising skilled workers and building university capacity, maximising innovation to create productivity, a Fair Work Act overhaul, reforming approvals to reduce delays and locking in stable and internationally competitive tax and royalty regimes. The report warns this transition is being challenged by sharply rising operating costs in Australia and a loss of competitiveness against miners in Chile, Peru, Mongolia and Mozambique, which have policy settings that constrain costs, are adopting new technology and finding new sources of capital.
The mining investment report, based on 301 interviews with mining industry stakeholders around the world, showed the industry was worried about increasing “nationalism” as governments moved to extract more revenue from the industry.