They say a day in politics is a very long time, well a year in the mining and energy sector – since I last spoke here – feels like a life-time.
This time last year iron ore was at around $120 a tonne, thermal coal $82 a tonne and crude oil $100. Today these prices are $55, $65 and $47 respectively.
Now is a time for cost-cutting and innovation driven efficiencies.
Of course, Australia as a small open economy, influenced heavily by resources and primary industry exports, has had long experience with the cyclical behaviour of such sectors. Yet, the unprecedented uncertainty surrounding the future seems very well placed.
The key drivers of the recent boom years, namely, many of the emerging economies, in particular China, are facing extremely unchartered waters. In China, very high real interest rates and the accelerating trade-weighted rise in the yuan, along with fiscal contraction of European-like proportions, a massive property overhang and excess capacity across the economy, suggests Asia is looking down the barrel of a major credit squeeze.
This explains the rapid slide in global resources prices. To correct all this China, and the world, needs growth. The central banks in the developed world are relying on financial repression to boost growth. Of $22 trillion in developed world government bonds, two-thirds have yields below the rate of inflation.
For China, the investment-driven growth model of the past has run its course. Monetary policy options are hemmed in by their fixed exchange rate, which is seeing accelerated outflows of capital, and a narrowing trade balance.
The near term is a picture of a world awash with cheap money, but also awash with perhaps unprecedented investor uncertainties.
What we are witnessing is a reshaping of the global centre of gravity for economic growth. Yet, for those parts of the developed world, able to capitalise on opportunities, the long-term looks hugely positive.
It is forecast that between now and the end of the century, populations in the emerging world are set to grow by 3.6 billion people (or greater than 60 per cent). By contrast, the developed world population is expected to grow no more than three per cent, or just over 30 million people.
Billions of these people in the emerging world will be in the middle class. This economic phenomenon has well and truly begun, and will continue despite the current prevailing uncertainties and global restricting pains.
All of this explains the urgency placed on trade and investment by the Australian government.
The three free trade agreements completed with China, Japan and Korea last year, effectively open up more competitive access to markets totalling 1.5 billion people.
At last year’s conference I outlined our priorities in regard to Australia’s resources and energy sector. While the peaks of the boom – including the major investment phase – have abated, I remain optimistic about Australia’s future prospects.
We are a resources and energy superpower and we are determined to remain so. The next phase entails increasing and competing on volume given the weakening commodity prices and much weaker Australian dollar.
This is borne out in recent trade figures – in 2014 the volume of resources exports was 12.7 per cent higher compared to 2013. Over the same period the value of resources exports rose just 0.4 per cent – a combination of the lower dollar and weaker commodity prices.
This time last year for example the Australian dollar was trading at about 93 cents US currently it’s around 76 cents. As mentioned earlier, iron ore was trading at around $120 yet today it is around $55.
Cutting costs, not quality
Australia has a comparative advantage over many given the high quality of our minerals and resources. But, given the world is awash with minerals and gas, lowering costs and continued innovation are critical to maintaining Australia’s competitive position.
In a funny sort of way, this cyclical downturn is a major opportunity for Australia following a boom inspired explosion in costs. Very little world-wide will be sanctioned in the near future.
So, when the inevitable upturn comes, Australia will have had the opportunity to slim down and get ‘match fit’.
We will be ultra-competitive because a brownfield expansion will beat a greenfield project virtually every time. We should have first -mover advantage. The sector itself is continually introducing better technology and practices through our world-leading METS sector.
Cutting costs for business – in particular in our resources and energy sector – has been a major priority of the Australian government. The carbon tax and mining taxes, which were lead weights around the industry, have been scrapped.
We are delivering a most significant deregulation: through six-monthly regulation repeal days we have removed over 21,000 regulations – saving business over $2 billion in compliance costs per year.
We have created a ‘one-stop shop’ for environmental approvals that eliminates duplication between states, territories and the Commonwealth, saving business $426 million per year.
Federal project approval times have been slashed to below 200 days from an average of 470 days in 2012.
Federal Environment Minister Greg Hunt has quickly approved 145 projects worth over $1 trillion in economic value; the majority of which are in the resources and energy sector. We’ve still got great environmental protections – investors can be confident projects approved by Australia will meet or exceed international standards. Australia is in fact ranked third in the world for environmental management.
Likewise, Australian industry leads on corporate social responsibility and indigenous engagement. Rio Tinto, BHP and Fortescue Metals are all setting a fine example. Fortescue, for example, aims to create 50,000 jobs for indigenous Australians and has awarded over $1 billion in contracts to indigenous companies.
As well as reducing costs, we’re also increasing efficiency through ongoing application of smart technology and management solutions.
Our METS sector is highly competitive across the complete mining supply chain and contributes around $90 billion to Australia’s economy annually, including exports of over $27 billion. Australian METS companies are also enhancing productivity across the world from North and South America to Asia and Africa.
Investing for the future
Longer-term demand for resources and energy will remain strong on account of the rising middle class in Asia Pacific. This applies to powerhouse economies like China as well as other regional players such as Vietnam, which recently indicated its need for increased imports of thermal coal.
India of course has major development plans, increasing demand for iron ore, coal, uranium and gas. It’s where China was 10-15 years ago. India recognises its increasing need for energy imports and has set about securing long-term supplies, including from Australia.
During a recent visit to India, Woodside signed an MoU with Adani for provision of LNG.
Our LNG production is expanding significantly – Australia is set to become the world’s second-largest exporter by the end of next year and the largest by the end of the decade.
Seven new projects under construction or recently completed amount to A$190 billion of capital expenditure and 61.8 million tonnes of potential new capacity. It is estimated this would represent almost a quarter of current global capacity and 60 per cent of new capacity.
We’ve seen major scales of investment in infrastructure elsewhere – I saw this first hand during a five day visit to the Pilbara last year: which included Roy Hill, Gorgon, Rio and BHP operations.
And Foreign Investment is a key component; the Adani coal project in Queensland’s Galilee Basin can provide affordable energy to 100 million Indian homes for 100 years, GVK’s Alpha mine, rail and port project and Landbridge Group of China – a A$200 million investment in Queensland coal seam gas producer WestSide last year.
The investment pipeline remains significant with 44 projects at the committed stage valued at A$228 billion, as at October 2014, including:
- o 14 energy projects worth an estimated A$197 billion.
- o 25 mineral, mining and processing projects worth an estimated A$21 billion.
- o Nine infrastructure projects valued at A$10 billion.
- o A further 59 projects at publicly announced stage with combined value between A$75 billion to A$94 billion.
So there is cause for optimism. Latest medium-term forecasts project average annual earnings growth of 6 per cent for our resource and energy commodities between 2014-2015 and 2019-2020, when they’ll reach A$240 billion in current terms.
And by 2020, Australia is projected to become the world’s largest exporter of LNG, iron ore and coal. Competitiveness and investment will ensure Australia remains a key mining power through to the next big phase of expansion.
- Trade Minister's Office: (02) 6277 7420
- DFAT Media Liaison: (02) 6261 1555