The $100 billion boom
It’s what we’ve been waiting for — a wave of resources projects to revive our sagging exports, pay for all those imported luxuries and keep the lucky country’s economic miracle alive for years to come
The Weekend Australian -- Andrew Trounson -- December 18, 2004
theaustralian.news.com.au
One of the world's top mining executives, the ready-smiling Rio Tinto chief executive Leigh Clifford, admits he and his peers have been taken a little by surprise.
"I don't think that anyone could've forecast" the demand for Australian resources from China, says Clifford, acknowledging what has become a global phenomenon.
A surge in mines, wells and processing plants has begun as a result of the cascading demand from everyone's favourite trading partner of this decade.
Australia's next boom has exceeded $100 billion on paper - and that's just the foreshadowed spending on development.
Resources companies could lift Australia's export income by hundreds of billions of dollars early this century from this new investment in initiating or expanding mines, oil and gas wells and processing plants.
It was revealed this week that companies have begun work on, or committed to, a record 73 resources projects across the country as miners plough more than $24 billion into an expansion bonanza during the next five years to capitalise on soaring commodity demand internationally.
China's rampant economy is sucking in steel-making materials, base metals and gas to fuel a rapid industrialisation that has had Chinese annual economic growth nudging double percentage digits.
A further 134 projects are on the longer-term drawing board, amounting to an additional $72.5billion worth of potential capital spending.
In the six months to October this year, nine key resources projects were completed, worth $3.3 billion in spending, of which the largest was a new liquefied natural gas plant at the North West Shelf in Western Australia to supply Asian buyers. And the completion rate was accelerating, with 15 projects scheduled to be completed in the last two months of the year.
The resources boom promises to provide a new kick to the country's economy and help rein in a ballooning trade deficit by reinvigorating exports.
Its scope emerged in the Australian Commodities publication of the Australian Bureau of Agricultural and Resource Economics for the December quarter. But the benefits of the new century's resources boom in Australia's export volumes have been less than expected as miners initially responded too cautiously to the emerging growth in China and infrastructure constraints limited the industry's ability to rapidly ramp up some exports.
Mining companies, along with everyone else, have been surprised by the extent of China's voracious demand for materials to make products for its huge population and for its exports, and were slow off the mark in approving new projects.
While they are scrambling to press the button on new developments, they are handicapped by their previous under-investment and have come up against a brick wall of rail and port bottlenecks, as well as shortages of skilled labour and equipment.
In the 1990s, when mining was struggling with low prices, a geologist was more likely to be driving a cab than drilling for ore. But today, after prices and demand for that ore skyrocketed, there aren't enough geologists, miners, drill rigs and contractors to go around. Some miners have even reported shortages of explosives.
The labour shortfall is such that Tony Palmer, the chief executive of Australia's largest goldminer, Newcrest, doubts that he'd be able to find the people today to undertake his $1.2billion Telfer goldmine redevelopment in Western Australia that started two years ago and is now in the commissioning stage.
Bottlenecks at ports are costing the coal industry billions of dollars' worth of potential sales. At the leading coal ports of Dalrymple Bay in Queensland and Newcastle in NSW, the queues of vessels waiting to load at times number more than 30 ships.
Australia's biggest export coalmine, Rio Tinto's Blair Athol mine in Queensland, has had to shut down intermittently because of the delays in moving shipments.
Federal Treasury's head of economics Martin Parkinson says the mining industry's response to rising demand has been slower than expected. "In the last couple of years, we have been assuming that the behavioural response would be faster and we got it wrong. [But] it is clear that we are now seeing a significant increase in exports," Parkinson said this week.
ABARE, the Government's commodities forecaster, says the value of Australia's commodity exports, including farm products, could rise 15per cent to a record $95 billion in the 2004-05 financial year.
That rise will be driven by a minerals and energy sector that is expected to generate $65 billion in export earnings, up 23 per cent from the previous year. But that increase will be largely driven by higher prices.
Total mine production, of which the bulk is exported, is forecast to rise by a strong, but comparatively weaker, 5.3 per cent in 2004-05, having fallen 2.6 per cent in 2003-04.
The chief economist in Sydney for the Switzerland-based global investment bank UBS, Scott Haslem, is in no doubt that while Australia's resource exports are set to rise in coming years, the country has been slow to improve production and in some cases has likely lost some market share to rivals such as Canada.
In the face of the strongest upswing in commodity prices in the past 30 years, Haslem says Australia's export volumes have been disappointingly flat up until now.
"We have missed the global upswing," Haslem tells Inquirer.
But the good news is that the present bull run in commodity prices looks to be longer than previous cycles, courtesy of China's relentless demand and the prospect of accelerating economic growth in other emerging and populous economies such as India and Brazil.
The caveat, of course, is that other countries can also be expected to push commodity exports and that new supply will weigh on prices.
Earlier this month, Australian National University economist Ross Garnaut said that if China's industrial strength continued, real export prices could remain above the average of the past 25 years but a normal lift in supplies worldwide could cause prices "to retreat a long way from their current giddy heights". And in certain commodities, such as gold and base metals, Garnaut, who is also chairman of Lihir Gold, says there is greater scope for expanding production offshore than here in Australia, suggesting a likely loss of market share. For the growing Chinese iron ore market, Garnaut says Australian-sourced iron ore is already losing some ground to rival production from places such as Brazil and India.
In the longer term, ABARE is concerned that exploration spending in Australia isn't keeping pace with the potential supply opportunities. Minerals exploration spending in 2003-04 was flat on the previous year at $1.73 billion and in real terms was 17 per cent below the annual average of the past 23 years.
Nevertheless, there is a growing confidence among Australian miners the demand is there for the committed new projects that will significantly boost export volumes from late 2005. That, combined with a moderating domestic economy and slowing import growth, should start to rein in the ballooning trade deficit that reached $6 billion in the September quarter.
That is despite an expected slowdown in world economic growth and high oil prices that act as a brake on growth. ABARE is tipping world growth to slow to 3.6 per cent in 2005 from an expected average 4.5 per cent in 2004. In China, growth is forecast to slow from 9.3 per cent this year to a still impressive 7.3 per cent in 2005.
But the delay in ramping up our export volumes means a narrowing in the deficit in the current account, which includes trade, will be slower than it might have been. UBS is forecasting the current account deficit to gradually narrow to 5.5 per cent of gross domestic product in 2005 from about 6 per cent in 2004 and to narrow further to 5.25 per cent in 2006.
While it is easy to point the finger at mining companies and infrastructure providers, the industry had been badly scarred by repeated booms and busts as miners gleefully increased production on price spikes, only to create massive surpluses that would weigh on prices for years.
Through the late 1990s and early this decade the industry went through extensive rationalisation as low prices left miners vulnerable to majors such as Rio Tinto, which went on an acquisition spree. At the same time Rio's great rival BHP, as it then was, had to write off billions of dollars' worth of ill-advised and unprofitable expansions and investments. The net result was a more concentrated and conservative industry, ruthlessly focused on shareholder value. In 1999 BHP, under American chief executive Paul Anderson, shut down the Newcastle steelworks in NSW, taking with it $1 billion worth of annual export revenue that, according to Haslem, has yet to be fully recovered.
So when China-driven demand began to rise, it is little wonder the industry was relatively slow to react.
Rio Tinto's Clifford yesterday noted that steaming coal prices in Asia had virtually doubled to more than $US50 ($65) a tonne in the past year.
While infrastructure expansions in Australia had been "slow getting off the mark", he says he is confident the bottlenecks will be addressed during the next few years. And he says Australia isn't alone in being caught out by the sharp rise in demand. "There is congestion everywhere," he says.
BHP Billiton, now the world's largest mining company, first started to realise the potential scope of the China-led resources boom back in late 2001 when Chinese demand for iron ore began to rise. About six months before, BHP Billiton had unified its various marketing arms in China into one headquarters in Shanghai.
With the benefit of a pooled knowledge-base and with the freight market tightening, it began to dawn on BHP Billiton executives that the world could be entering a commodity boom akin to the post-World War II boom led by the economic recovery of Japan and Germany.
"That sharing of knowledge started to say to us that this isn't just a one-product issue," BHP Billiton's chief executive Chip Goodyear told The Australian recently.
By June of the next year, BHP Billiton was confident enough to start acting, approving the development of the new Mining Area C iron ore mine and Port Hedland port expansion in Western Australia's Pilbara.
By early this year the market for iron ore was so hot that Goodyear found himself taking cold calls from Mississippi cotton traders looking to cash in by scouting for iron ore on behalf of their Chinese clients.
In February the company approved a further expansion to raise annual capacity to 110 million tonnes from 100million, and in October announced a plan to spend $US575 million to raise capacity to 118 million tonnes by the second half of 2006.
The Chinese dragon is using massive amounts of steel for construction and that means it desperately needs Australia's iron ore and coking coal. But it also needs copper for wiring, nickel for stainless steel and zinc for galvanising.
Demand for energy, be it thermal coal, liquefied natural gas or uranium for nuclear plants, is also on the rise, not just in China but across Southeast Asia and India.
The committed new resources projects in Australia are dominated by energy developments - oil, gas and thermal coal for electricity accounting for $10.7 billion, or 44 per cent, of the $24.3 billion spending total.
The largest of these is US oil major ConocoPhillips's $3 billion project to build a liquefied natural gas processing plant in Darwin. The project, which will be the first new LNG plant outside of the North West Shelf, will take gas in from the Bayu-Undan fields in the Timor Sea and will be completed in 2006. Also in that year Woodside Petroleum expects to bring into production its $1.48 billion Enfield oil field offshore Western Australia, and its $1.1 billion Otway natural gas project off the Victorian coast.
Among mining projects, BHP Billiton has underwritten its confidence in the nickel market by committing $1.5 billion to the development of its Ravensthorpe nickel deposit near Esperance in WA. Sited nowhere near processing facilities, BHP Billiton plans to ship the part-processed nickel ore all the way to its Yabulu refinery at Townsville in Queensland. First production is slated for 2007.
Also in WA, rival Rio Tinto is spending $1.25 billion expanding its Yandicoogina iron ore mine, which will be completed next year.
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