Article – Miners can adapt to tougher price competition: report – Australian Financial Review

John Kehoe

The easy days of sky-high commodity prices delivering fat profits to resources companies, shareholders and federal and state governments are fast coming to an end.

China’s rapid industrialisation and a lag in mines coming into use around the world enabled commodity price rises to deliver almost half, or $44 billion, of the $93 billion in minerals revenue growth in the past five years.

Much of the success from the boom was good luck due to external forces, and less about good design.

It always defied economics that the money-for-jam mining boom days could roll on without interruption. Inevitably, producers respond to the inducement of higher prices and supply catches up with demand.

So with new mines emerging from competitors in Africa and South America, commodity prices declining and sharply rising operating costs in Australia for labour, energy and transport, policymakers and managers will need to act to help the resources sector maintain international competitiveness and continue to deliver economy-wide benefits.

Operators of low-cost and high-grade iron ore deposits, such as BHP Billiton’s and Rio Tinto’s established Pilbara projects, are not under threat.

It is emerging mines with higher costs and less management experience which sprung up from 2008 in response to surging commodity prices which face the greatest pressure.

Capital costs soared 205 per cent at Sino Iron, 150 per cent at Midwest and 160 per cent at Gindalbie.

Local iron ore projects are 30 per cent more expensive than the world average and thermal coal costs are 66 per cent higher, the Port Jackson Partners report says.

Brazilian iron ore will be cheaper to deliver to China than all other ore except that from established Pilbara projects by 2020.

The PJP report for the Minerals Council of Australia argues Australia must acknowledge it has a “homegrown” competitiveness problem.

That assessment appears at odds with the current record levels of mining investment, a point Treasurer Wayne Swan has identified to rebut those scaremongering about the so-called sovereign risk associated with the mining and carbon taxes.

History is not necessarily a future guide and complacency is a risk.

Resource-rich nations such as Australia have a track record of failing to take advantage of mining booms, which have often ended ugly. Notably, about 75 per cent of major projects currently listed by the Bureau of Resources and Energy Economics remain uncommitted.

To ensure the pipeline translates to export volumes, the report says a range of reforms are required so Australia does not lose out in sharing in the spoils of the forecast rise of 50 per cent to 200 per cent in global demand for minerals in the next 20 years.

Much of the demand will come from industrialisation in China and other developing economies such as India, south-east Asia and Africa.

To rein in spiralling costs and to boost productivity, policies being urged include: greater use of skilled migrant workers, more flexible workplace relations laws and increasing enrolments in mineral-related university courses. The industry says these initiatives would address the primary driver of costs. Construction wages, which account for 35 to 50 per cent of total construction costs, grew 9 per cent a year in the past decade.

Other items on the wish list are: fixing the government’s budget deficit to take pressure off the Australian dollar, optimising multi-user infrastructure, following Canada to improve project approvals to reduce delays and locking in stable and globally competitive tax and royalty arrangements.

The Minerals Council says this will help develop new low-cost brownfield and greenfield expansions. Australia can generate an estimated extra $121 billion in minerals revenue a year by 2031 if it has the right policy setting to increase export volumes and maintain its present global minerals market share.