BMI View: Gold, copper and bauxite will emerge as the Australian mining industry's production growth bright spots during 2016-2020. Iron ore and coal output growth will slow more markedly due to continued price weakness.
Although Australia will remain one of the world's largest mineral producers, growth will slow across the board due to continued mineral price weakness. The Australian mining sector will be particularly affected by China's economic slowdown, as the country accounts for almost 80.0% of the country's iron ore exports. We expect Australia's mining industry value to fall to USD94bn in 2016, down from USD106bn in 2015. We forecast Australia's mining industry value growth to pick up hereafter, reaching USD112.6bn in 2020. The potential return of La Nina this year poses downside risks to coal and iron ore production forecasts.
|e/f = BMI estimate/forecast. Source: Australian Bureau of Statistics, BMI calculation|
|Australia||Mining Industry Value, USDbn||123.70||106.20||94.40||94.50||99.20||105.80||112.60|
|Australia||Mining Industry Value, USDbn, % y-o-y||-11.00||-14.10||-11.10||0.10||5.00||6.70||6.40|
Latest Developments & Structural Trends
We forecast iron ore production in Australia to register average annual growth of 2.0% during 2016-2020 compared to 10.7% during 2011-2015.This is due to mothballing of mines from junior miners as iron ore prices remain weak as we believe that majors will stick to their production growth targets to crowd out high cost producers. Beyond 2016, iron ore production will start to slow from 4.9% in 2016 to -1.3% in 2020 on the back of low prices. We expect Australia to remain the top global producer of iron ore, with production increasing from 754 million tonnes (mnt) in 2016 to 792mnt by 2020. Australia's share of global output will average 25.5% during this period.
Australian bauxite production will grow over the next few years due to the expansion of Rio Tinto's Weipa mine and the Amrun project that was approved in November 2015. Rio Tinto's Weipa project will double the mine's production capacity by 2019, reaching 50.0mnt per annum, while the Amrun project will see an extra 10.0mnt per annum from the Queensland mine reaching a total of 22.8mnt per annum by 2019. The Indonesian export ban and Malaysia's moratorium on bauxite mining will benefit Australia's bauxite sector by shifting investment to Australia. While bauxite accounts for only 4.7% of Australian mining value, the country is the global top producer, providing about 31.1% of global supply in 2016. Bauxite production will increase by an average of 9.1% per year by 2020, reaching 122.3mnt in 2020 from 82.4mnt in 2016. This is compared to the 3.3% annual average growth during 2011-2015.
The Australian coal industry will experience limited production growth due to weak prices, environmental regulations, and increasing competition from lower cost foreign producers weighing on production. We expect Australia's share of global coal production to stagnate and remain at 6.2% during 2016-2020. Production will reach 500mnt by 2020, slightly higher than 481mnt in 2016, as y-o-y growth for that period will slow to 0.9%, compared to an average annual growth of 2.6% over 2011-2015. Growth will remain positive as lower production costs and take-or-pay contracts with freight operators will incentivise production. The repeal of the country's carbon tax in July 2014 failed to benefit the industry. Subdued coal prices will weigh most heavily on firms, as we forecast thermal coal prices to average lower y-o-y at USD51/tonne in 2016 before modest gains to USD52/tonne in 2017. As a result, Glencore announced the 2015 closure of its Newlands underground mine, as well as suspending production at its Ravensworth mine.
We forecast Australia's copper production growth to register an annual average of 3.6% during 2016-2020, which is a significant increase from the 1.0% during 2011-2015. Australia's copper sector production will be buoyed by projects such as BHP Billiton (BHP)'s expansion at its Olympic Dam, and Sandfire Resources' DeGrussa copper mine, which will produce 300 thousand tonnes per annum (ktpa) at full capacity. Australia will remain the fifth largest copper producer in the world, producing 1.1mnt of copper by 2020.
Australia's gold production growth will improve as higher gold prices increase miners' profit margins. Based on our forecast for gold prices to improve from USD1,275/oz in 2016 to USD1,500/oz in 2020, we expect Australia's gold production to total 13.9 million ounces (moz) in 2020, up from 11.4moz in 2016. Production growth will increase to 5.6% during 2016-2020, compared to 5.0% during 2011-2015.
We forecast Australia's zinc production to register annual average growth of -0.9% during 2016-2020, which is due to a 30.0% decline in 2016 attributed to the closing of Minerals and Metals Group's (MMG) Century zinc mine in August 2015. From 2017 onwards we expect positive growth rates increasing to 7.5% by 2020. In 2015, Glencore' s Mount Isa Mines and McArthur River mine accounted for approximately 54.7% of Australia's total zinc output. We expect Australia's zinc sector will account for 2.0% of Australia's cumulative mining industry value in 2016, down from 2.9% in 2015. Overall, we expect the zinc industry in Australia to shrink by 36.8% y-o-y in 2016.
Australia's nickel mine production will expand 6.1% on average per annum during 2016-2020, compared to 7.5% during 2011-2015. Production declines in 2014-2015 were partially attributable to Norilsk Nickel, which decided to sell the firm's Australian portfolio in 2013, and First Quantum Minerals' Ravensthorpe mine halt in December 2014 due to a tank failure, respectively. Norilsk's divested portfolio includes four nickel mines that had been idled due to low prices and an escalation in production costs to around USD18,000/tonne. Ravensthorpe has resumed operations since August 2015, albeit at 50% of capacity. It will reach full capacity in another six months time, where it is expected to produce 38,000 tonnes per annum. With nickel prices set to disappoint, new supply growth will come from expansions of low cost nickel projects and the development of low cost green field projects in Australia.
Australia's tin production will increase on the back of several key mining projects coming online over the coming years. We forecast tin production growth to average 2.9% y-o-y during 2016-2020, compared to the 1.5% over 2011-2015. We expect production to increase from 7.1thousand tonnes (kt) in 2016 to 8.1kt by 2020. Growth will primarily be driven by the sector's strong project pipeline. For instance, Metals X will continue expanding through brownfield investment, and has reported new high-grade reserves at Renison Bell mine, the largest tin mine in Australia. Other high-grade tin mine expansions include Stellar Resources' Heemskirk project, which boasts an estimated 4.4mnt reserve.
We forecast lead production in Australia to register an annual average growth of 0.4% during 2016-2020, compared to a 1.1% decline over 2011-2015. Production will increase from 601kt in 2016 to 644kt by 2020. We expect Chinese firm MMG's USD1.4bn Dugald River mine to be the bright spot in lead production over the coming years as a declining zinc sector will drag down lead production with mine halts. Subsequent increases in zinc and lead prices will lead to better output growth from 2018 onwards.
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