Australasian Mining Review

Australasian Mining Review Summer 2011

Australasian Mining Review

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Page 19 of 151

16 The Australian coal industry St. George Economic Research • Global coal prices have boomed roughly three times during the last century. The reason behind the current boom is increasing demand from China and India for both thermal and metallurgical coal. • We are being told by a wide variety of commentators including the large mining companies and the RBA that this boom will last many years, possibly decades, and on the way China and India will become huge consumers of raw materials. • China itself is a major coal producer. In the first quarter of 2010 its output was 751Mt (million tonnes) raising its annual capacity to 3.6Bt (billion tonnes) – considerably in excess of Australia’s output. Even so, China has moved from a net exporter to a net importer in the last five years. • Australia is exporting additional tonnes to China as well as Japan, Korea and Taiwan as China has gradually withdrawn from these markets. India is also increasing its appetite for Australian coking coal. • The new opportunities in the Asia-Pacific market have seen Australian producers and governments plan for a doubling of export capacity at our ports over the next 10 years. • This represents a significant near-term lift in investment for both Queensland and New South Wales. New South Wales is usually not considered a “mining state.” This is despite investment in mining and mining infrastructure being more than by any other industry. In June 2010 it was 17 per cent of total private capital expenditure – 10 years ago it accounted for only two per cent. In the next year or so it is set to be 19 per cent of total. • In Queensland the share of private investment going into mining is currently 29 per cent. According to the Australian Beureau of Statistics (ABS) this investment will drive business expenditure over the next [several] years and account for a remarkable 56 per cent of the total. • If investment continues this trend it risks seeing a considerable shift in resources – both labour and capital – towards mining and away from other industries presenting a fundamental shift in the economy. • How big is the boom? The surge in prices and profits in 2008 during the worst of the global financial crisis was so large as to help lift the Terms of Trade to a 60-year high. It is providing much of the finance for the current expansion in infrastructure. • This spike is likely to be a one-off as prices have eased significantly since 2008 and returns have been magnified by a significant depreciation in the Australian dollar. The dollar has now rebounded and is near parity with the US dollar. The risk is that prices will continue to be volatile while also trending downwards as in previous commodity cycles. • This volatility could potentially spill over to the macro economy with activity now becoming increasingly reliant on the commodity cycle to drive growth and investment. Australia has experienced a commodity shock, which so far has been positive, offsetting the global slowdown. However, while commodity cycles shock on the upside, they also shock on the downside. Coal driving investment If investment is the driver of long-term growth then the picture of current and future investment flows is an important one. According to the ABS’s quarterly survey of businesses, NSW and Queensland spending is about to expand markedly over the next 12 to 18 months. Since the global financial crisis investment has been relatively subdued. This has been particularly the case in Queensland where investment has been negative for the last five quarters on a year- on-year basis. NSW investment contracted in the second half of last year and has since rebounded. Expenditure should be rebounding. As the economy moves into cyclical upswing, corporates take advantage of lower interest rates by expanding capacity in the hope the improvement in demand will more than offset the original cost of the debt. Where that expenditure is directed is more interesting. The ABS figures not only show a sizeable lift in proposed capital spending, they also show where that capital will be spent and in what industries. In both States it is mining that is attracting the greatest share of investment flows. Queensland’s metallurgical coal is in heavy demand from Asian steel meals, while NSW’s

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