BMI View: Australia's mining sector is set to suffer the painful spillover effects of a prolonged period of weak mineral prices, in part resulting from a sharp investment slowdown in China.
Australia has been among the biggest beneficiaries of the China-led commodities boom over the past decade, attracting huge amounts of investment into the minerals space. Driven by China's voracious appetite for key commodities such as coal and iron ore, the value of Australia's mining industry had increased by more than six-fold from USD24bn in 2003 to USD154bn in 2013. As a result, this has seen the sector's share of GDP rising from 4.5% to 10.2% over the same period. However, the boom years in the mining industry are over. With China's economy on course for a continued slowdown over the coming years and mineral prices set to remain low, Australia's mining sector will suffer the painful spillover effects.
|Boom Is Over|
|Australia - Mining Industry Value|
|f = BMI forecast. Source: Australian Bureau of Statistics, BMI|
We believe Australia will be the biggest loser from the mineral imports shift in China. The latter commands a prominent role in Australia's exports of key commodities including coal and iron ore. China's increased reliance on domestic coal coupled with an energy mix increasingly reliant on renewables will continue to weigh on Australian coal exports. Already, the mining sector is feeling the crunch of plummeting commodity prices as a string of miners mothball their unprofitable operations. Large miners like BHP Billiton, Rio Tinto and Fortescue have also scaled back on capital expenditures and are shedding unprofitable assets. The rising tide of economic nationalism, declining labour productivity and aggressive minimum wage legislation will compound the challenges in the mining industry, amplifying the downshift in Australia's economy going forward. We expect the value of Australia's mining sector to reach USD141.1bn by 2019, growing at an annual average rate of 0.2% over our forecast period. This contrasts with an average growth rate of 21.5% per annum over the past decade.
|Heavy Chinese Exposure|
|Australia - Exports of Iron Ore (LHS) & Coal (RHS) by Destination (% of Total)|
|Source: Australian Bureau of Statistics, BMI|
Despite the fading of the mining boom, Australia will remain a leading player in many segments of the global mining industry given its rich deposits of minerals including iron ore, nickel, bauxite, copper, gold, uranium, diamonds, zinc and coal. Moreover, Australia's mining sector is one of the most business-friendly in the world, with domestic companies and overseas miners operating in the country. As mining is a key part of Australia's economy, due to the drop in commodity prices, in September 2014, it repealed the highly unpopular 22.5% mineral resources rent tax on coal and iron ore miners which came into force in July 2012. The immediate removal of import tariffs on aluminium oxide and coking coal along with the gradual removal of tariff on thermal coal when Australia's signs its free trade agreement with China is a potential bright spot for the mining industry in Australia.
Given its vast potential and high quality of infrastructure, Australia is home to some of the biggest players in the global mining industry. Multinationals operating in the Australian mining industry include Australian companies BHP Billiton and Newcrest Mining and large overseas miners such as Rio Tinto, Norilsk Nickel and Glencore. We believe the mining industry will continue to consolidate over the coming quarters as the financials of a growing amount of miners become increasingly poor as mineral prices continue to remain depressed.