Major change is predicted for the resources export industry. Joe Parkes looks at how the mining industry is planning growth through a possible downturn, improve efficiency, develop partnerships and create new online systems.
Australia’s dazzling resources export boom about to falter? After two years of spectacular growth—in which the Australian mining industry has grown by around 40 percent—how seriously are we to take suggestions that the end of the boom is not far off?
Very seriously, according to strategic business information provider IBISWorld. It believes that a big, heavy foot is about to be applied to the resource industry’s brake and, after some modest gains in the year ahead, the future outlook will be “mixed”.
In an industry that made more than $31 billion in 2005–06 (buoyed by strong demand from China that underpinned both demand and prices for a range of mineral commodities) there’s an understandable apprehension that a downturn could create problems for a cross-section of mining companies, including a swag of smaller miners.
The Australian Stock Exchange (ASX) says almost 20 percent of the market by capitalisation comprises smaller mining and mineral exploration companies, almost one-third of all companies listed on the ASX. And an estimated 400 to 500 mining support companies, including many SMBs, are providing technologies, equipment and services, such as computer systems and software, to miners all over the world.
Primary target markets are Indonesia, Chile, Peru, Brazil, Argentina, India, China and countries in sub-Saharan Africa. Our exporters are also active in Papua New Guinea, the Philippines, Vietnam, Poland, North America, the Middle East and New Zealand.
If there’s a downturn in the market, will these firms start feeling a chill breeze round their fetlocks? No, according to Alan Broome, chairman of Austmine, Australia’s mining equipment and services export association. While Broome agrees with IBISWorld that a downturn in Australia’s mining boom is likely, since any “super cycle” has an inbuilt potential downside, he suggests their take on timing is “open to debate”.
ABARE (Australian Bureau of Agricultural and Resource Economics) seems to agree. Its latest forecast for the resources industry predicts earnings from commodity exports will rise by 16 percent to $143 billion in 2006–07. Dr Brian Fisher, executive director, says the value of Australia’s minerals and energy exports is forecast to be around $110 billion in 2006–07, compared with an estimated $91.8 billion in 2005–06. The value of Australia’s energy exports is forecast to increase from $41.2 billion in 2005–06 to about $48 billion in 2006–07. For metals and other minerals, export earnings are forecast to rise by 22 percent to around $62 billion.
Alan Broome also quotes finance groups CitiGroup and UBS which both suggest that demand for mineral resources from China and India will continue for the medium term. Broome reckons a downturn will be doubly good news for our mining technology and service companies, many of them SMBs. “In a period of downturn, mining companies look to improve their competitiveness as prices force them to reconsider their costs and productivity,” he says. “Technology helps them improve their efficiency and reduce costs.
“BHP Billiton and Rio Tinto Iron are already looking at efficiencies to improve their iron ore processing and alternatives to their present operations because they believe there will be a downturn at some time in the future.”
Broome says both BHP and Rio Tinto believe when the downturn comes, it will last for two to three years. He believes the industry has already had a foretaste of what’s to come thanks to the recent closure of BHP-Billiton’s Escondida mine in Chile—the world’s largest copper mine—because of a strike by mining workers that cut production by as much as 60 percent. “The situation at Escondida highlights the need for new systems and efficiencies,” he insists. “Austmine has already commenced discussions with Chile, at government level, to form a partnership between Australia and Chile to access our best mining technologies and incorporate them into Chilean delivery systems.
“Australia has the smartest and the best mining technologies in the world, and the only way for world mining communities to avoid downturns is to use those technologies to improve their mining operations. South America is already one of Australia’s most important mining industry trading partners, so this new extension of the relationship is really important for us.”
Mining Partnerships
An example of how the relationship is already working is at Micromine, a Perth-based computer systems company providing software solutions for the mining industry. It has formed a joint venture in Santiago to develop its range of products in Chile and throughout South America combining Australian technology with local know-how.
Mining companies everywhere have become regular and enthusiastic buyers of Australian mining support products with exports of products, technologies and services now worth some $2.5 billion a year, according to Austmine.
And India is one of many fast-developing markets. “We are talking with India about using Australian technology to improve their coal mining industry,” Broome says. “They see Australia as a partner in this process.”
Deming Whitman, CEO of AMIRA International, the industry association that manages collaborative research for its members in the global minerals industry, says something similar is beginning to happen in the former Soviet Union countries.
The Kremlin recently announced it had paid off its foreign debt in full—funded by income from oil and gas sales—so resources in the region have become a priority. Political and economic risks there had previously deterred international miners from investing heavily, and the market was left to locally-based companies to pursue resource opportunities. But not any more. Australia’s mining interests are in the vanguard as the former Soviet markets open for international business.
One of the latest new developments is the creation of a joint venture—RioNor Exploration—between Rio Tinto (49 percent) and Russia’s largest nickel producer Norilsk Nickel (51 percent) which will focus on resource developments in Siberia and the Russian Far East. This deal had barely been signed when BHP Billiton announced the signing of its own exploration alliance with Norilsk Nickel.
But the big miners don’t have it all to themselves and Australian mining support industry exporters—including several SMBs—are finding the old Soviet empire a promising new market for their technology and products.
Longwall Associates in Mackay, Queensland, for example, has extended its expertise in producing face conveyors for long-wall mining to Russia after establishing a foothold in China. It is also pursuing opportunities in India.
Hydromatic Engineering, based in the Hunter Valley region of NSW, is also carving out a successful market for its mine bolting equipment for long-wall mines in the Russian Commonwealth. The equipment attaches to other mining machinery produced by a variety of manufacturers in several markets and Hydromatic uses these relationships to ‘piggyback’ into markets like Russia.
Managing director, John Wood says he regards the Russian market as promising for future growth with the potential to become truly great. “It’s a difficult place to work in; fairly primitive in many respects and demanding in others,” he says. “It’s important to learn the rules the local market operates
by and to comply with them as far as you can. And you have to be able to speak the language.”
Hydromatic exports about 80 percent of its production to a number of customers, including the biggest Chinese miner, Shen Hwa. “We’re helping them improve their safety by selling them bolting equipment to stop mines caving in,” Wood adds. “In reality, China’s safety problems are no worse than in India.”
The company sells its highly regarded bolting equipment all around the world, from Iran to the United States, though Wood is not a great fan of doing business in America. “We set up there three years ago and sometimes I wish we hadn’t,” he says. “Among other things, they don’t like to pay. But I suppose we’ll all get over it.”
Whitman is “very excited” by what’s happening in the former Soviet Union. “Two important things have happened,” he explains. “The first is that these markets are now opening up and providing easier access for overseas suppliers, and the second is that the mining companies in these areas are developing greater perspective—they are becoming aware of the products and technologies that other mining countries are using and they want access to it too.
“People in Kazakhstan or China now want the same high quality levels of service they see being provided to other global miners.”
As miners everywhere looked for effective new systems to make their operations more competitive, opportunities for Australian suppliers grew, and there’s still potential. “Australian technology, systems and production equipment, is very highly regarded all over the world, but the reality is that all those miners in South America and Africa would rather be able to use home-made solutions,” says Whitman. “The challenge to Australia is to keep innovating and moving forward or the Africans and Americans and all the rest will simply run over the top of us.”
Whitman is reluctant to point fingers but admits the Australian Government needs to lift its game in providing financial support for the development of scientific and technological innovation. “The government must be very careful not to be blinded by Australia’s current resources success,” he warns. “If you chop off investment for research you will see a decline in Australia’s export effort and there’ll come a time when the government will begin to wonder why Australia is no longer competing with foreign suppliers.
“It’s been a long time between drinks for the mining support industry, so everyone needs to stay very focused to ensure our current success continues.”
Australian Ports
The size of Australia’s mining boom means that the demands on our ports are among the heaviest in the world—and heavy is the operative word. Minerals are so weighty that only ports with really deep harbours can handle the giant ore freighters that carry the coal and iron ore to international destinations.
These ships come in three main sizes: the smallest—known in the trade as ‘handies’—weigh almost 50,000 dead weight tonnes, while Panamax freighters weigh almost 80,000 DWT and Capesize vessels more than 80,000 DWT.
The Australian ports that can handle them have become among the busiest on earth.
The Port of Newcastle in NSW is the largest coal export port in the world, even though it relies on high tides to bring the giant bulk-carriers in and out of port. Coal accounts for more than 95 percent (by weight) of all commodities exported through Newcastle. Another six ports along the east coast handle Australia’s coal exports.
South of Sydney, Port Kembla is considered Australia’s leading port for the export of steel, handling more than 22 million tonnes of resource exports.
The vast minerals and petroleum boom in Western Australia has seen that state’s ports expand rapidly, along with an extensive transport and logistics network to support their activities. Australia’s major iron ore producers are located in the Pilbara, where Port Hedland has become Australia’s largest mineral port. It acts as a hub for iron ore mining inland from the town where some of the largest iron ore deposits in the world feed a growing global demand, especially from China.
WA is also a significant exporter of liquefied natural gas (LNG) with most coming from the North-West Shelf centred on the Burrup Peninsula. More than 1,600 cargoes totalling around 100 million tonnes of LNG have been shipped overseas since production began, using specially-designed 93,000 tonne ships.
In Queensland, 15 trading ports between Brisbane and Karumba in the state’s north-west and its major bulk trading ports—Brisbane, Bundaberg, Mackay, Townsville and Cairns—export more than 100 million tonne of product worth around $7 billion.
Victoria’s mining industry is concentrated on energy-producing minerals like brown coal, petroleum and gas. The state’s offshore gas production has increased and, despite a decline in crude oil production from Bass Strait, Victoria still produces nearly one third of Australia’s crude oil.
The Port of Geelong handles 25 percent of Victoria’s overseas exports, most of which are raw materials like petroleum products and other bulk items. The Port of Hastings handles exports of steel, iron, ferrous alloys, and LPG.
Mining Industry Meetings
In what could be one of the most significant opportunities ever to come the way of Australia’s mining support industry, senior executives of the world’s 20 largest mining companies are going to meet local suppliers in Perth next February.
They are coming to attend a board meeting of Quadrem—an online marketplace the major miners set up in 2000 to help the world’s mining industry buy and sell its equipment, services and technology.
Quadrem players represent 68 percent of global mining activity and their meeting will coincide with conferences in Perth by Austmine and by mining ministers from the APEC nations.
Quadrem’s aim is to cut costs for the mining sector by putting the buying and selling of products and services online. It connects more than 27,000 suppliers and 635 buyers; grows transactions at a cumulative rate of 21 percent a month; and handles more than US$12.5 billion in order throughput (data transfer rates) annually.
Austmine will also stage its conference in Perth (February 12–13) to coincide with the meeting of APEC mining ministers, following the Quadrem board meeting. Quadrem’s board members have accepted an invitation to join Austmine members at their conference.
Austmine’s Alan Broome says this will provide mining support companies with a unique opportunity to access “the most influential miners on earth”.
Australia is also sending a delegation headed by Resources Minister Ian Macfarlane to the next meeting of the International Mining and Mechanical Engineers conference in Calcutta this month.
Mint Case Study
It might come as a surprise to millions of gold, platinum, and silver coin owners in overseas countries if you told them those proud, national, prestige coins began life at the Perth Mint in Western Australia.
The mint’s CEO, Edward Harbuz, says Perth makes gold, platinum and silver coin blanks for “a number of international mints” in Asia, Europe and North America. “A lot of the blanks are created from Australian gold, but in some cases the customers send us their own gold to process into coin blanks,” he explains. “The value-added income from the sale of these blanks is roughly $11 million a year.”
This figure includes the value of any Australian gold used in the process but not the value of precious metals supplied by customers.
The Perth Mint’s total annual sales revenue is m
ore than $600 million, 70 to 80 percent of which is made through exports.
Perhaps even more dazzling is the Perth Mint’s depository, through which people anywhere can buy precious metals and maintain accounts in gold, silver or platinum instead of dollars, pounds or lira. “We keep the metals on their behalf and, when they are ready to sell, we organise the sales for them,” Harbuz explains.
“At present we have almost one billion dollars in precious metal account investments. Because we are creating a demand for Australia’s precious metals it helps the gold industry and is something we can be quite proud of.”
