Australia / Coronavirus Insights
The Outlook for Australian Mining

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by IBISWorld
Jul 01 2020

The Australian Mining sector has posted a mixed performance in response to the COVID-19 pandemic. Revenue fell by an estimated 14.1% in 2019-20, as a result of significant contractions in the prices of coal and natural gas. However, the sector has benefited significantly from strong iron ore prices, which have boosted the performance of major firms. Rising economic uncertainty and unprecedented money creation by central banks have driven up gold prices to record levels. The Mining sector is anticipated to recover at an annualised 2.8% over the five years through 2024-25. However, revenue is expected to remain below the peak of $306.9 billion in 2018-19, due to weak economic growth as a result of COVID-19.

The COVID-19 pandemic is expected to cause less disruption to the Mining sector relative to other segments of the Australian economy. The remote location of many major mines, in combination with a pre-existing strong focus on occupational safety, is anticipated to insulate most mining firms from significant operational disruption. The impact of COVID-19 on the industry is expected to be primarily limited to significant changes in commodity prices. However, some of these changes are expected to benefit sector firms. For example, a significant decline in oil and gas prices has reduced operating costs for most mining establishments.

Iron ore

The Iron Ore Mining industry is the largest segment of the Mining sector, and has posted a strong performance throughout the COVID-19 pandemic. Global iron ore prices remained above US$80 per tonne in May and June 2020, despite a contraction in global demand as a result of lower steel production. A significant outbreak of COVID-19 in Brazil has disrupted mining operations in that country, reducing sea-borne supply of iron ore and enabling Australian producers to increase prices without losing market share. High prices and growth in output have enabled the industry to generate an estimated $103 billion in export revenue in 2019-20 according to the Office of the Chief Economist. This result represents the highest level of export revenue on record.

Australia accounted for 53% of global iron ore production in 2019, while Brazil accounted for 21%. China accounted for over two-thirds of global iron ore demand. In response to the COVID-19 pandemic, the Chinese Government has implemented significant stimulus measures intended to support steel production, preserving demand for Australian iron ore.

Major players in the Iron Ore Mining industry have ramped up production throughout the COVID-19 pandemic, and have continued to invest in new production capacity. Fortescue Metals Group, which has a market share of 15.9%, announced that no operational investments have been postponed as a result of the COVID-19 outbreak. In April 2020, BHP Group announced plans to increase its export capacity from Port Hedland by 13.7%, to 330 million tonnes per year. BHP Group has a market share of 26.3%.

Over the two years through 2021-22, a decline in iron ore prices is forecast to hinder the performance of the Iron Ore Mining industry. Brazilian output is projected to normalize over the period, reducing the market power of Australian suppliers. A gradual appreciation of the Australian dollar is also anticipated to reduce the price competitiveness of Australian iron ore exports in foreign markets. According to the Office of the Chief Economist, Australia’s total iron ore export volume is expected to continue rising from 851.5 million tonnes in 2019-20, to 911.9 million tonnes in 2021-22.

Coal

Australia is the world’s largest exporter of metallurgical coal, which is used in steel making. Australia is also the second largest exporter of thermal coal, which is used for electricity generation. In 2019-20, Australia exported an estimated 182 million tonnes of metallurgical coal, and 213 million tonnes of thermal coal. The Australian Coal Mining industry operates at a competitive advantage to other nations, due to the abundance of high quality coal deposits in Australia. The industry has been severely disrupted by the COVID-19 pandemic, which has exacerbated pre-existing difficulties for Australian coal miners.

Both domestic and global coal prices have fallen significantly in the first half of 2020. Revenue for the Australian Coal Mining industry is expected to decline by 11.7% in 2019-20. The COVID-19 outbreak has significantly shifted the outlook for Australian coal mining. Prior to the emergence of the coronavirus, investment in new coal mines was anticipated to rise over the next five years. However, the disruption caused by the pandemic is expected to place many expansion projects on hold, such as Whitehaven Coal’s Vickery mine in New South Wales. Larger players including BHP Group and Yancoal Australia are expected to postpone final investment decisions on expansion projects until 2021 amid market uncertainty.

According to the Office of the Chief Economist, imports of thermal coal across Asia are forecast to decline from 908 million tonnes in 2019, to 878 million tonnes in 2022. Part of this decline is attributable to foreign economies opting to use their own internal coal supply, in an effort to support domestic economic recovery from COVID-19. However, this decline is also projected to be driven by an accelerated transition away from coal-based electricity generation, to a less carbon-intensive mix of natural gas and renewable energy resources.

Gas

Australia accounted for 22% of global exports of liquefied natural gas (LNG) in 2019. The Oil and Gas Extraction industry has been supported by a wave of investment in LNG export facilities over the past decade, driving growth in export volume from 17.9 million tonnes in 2009-10 to 79.1 million tonnes in 2019-20. Australia was the largest global exporter of LNG in 2019. The industry generated $69.6 billion in revenue in 2019-20.

The COVID-19 pandemic has led to unprecedented disruption in the global market for oil and natural gas. Prior to the emergence of the pandemic, Australian producers were already struggling to adapt to lower prices stemming from a significant supply increase from producers in the United States. COVID-19 has contributed to a collapse in demand for natural gas from the electricity generation, manufacturing and transport markets both in Australia and abroad. According to the Office of the Chief Economist, the spot price of LNG in Asia is expected to decline by 47.9% from 2019 to 2020. The price of LNG in Asia fell to a record low of US$1.70 per MMBtu in April 2020, and has remained subdued throughout May and June 2020.

Low natural gas prices have contributed to a deferment of four major Australian natural gas projects until at least 2021. The Prelude Floating LNG project, which shipped its first cargo in June 2019, was shutdown in February 2020 and has yet to reactivate. In a notable exception to the trend of the industry, Arrow Energy committed to the Surat Gas Project in Queensland in April 2020.

Australian export volumes are projected to remain flat over the two years through 2021-22, while export revenue declines significantly. Global natural gas prices are forecast to remain subdued over the period as available supply outpaces demand, as a result of ongoing restrictions on travel and weaker manufacturing activity. The Oil and Gas Extraction industry is anticipated to recover over the next five years, to grow at an annualised 2.3% over the five years through 2024-25.

Gold

The Australian Gold Ore Mining industry produced 335 tonnes of gold in 2019-20, and is anticipated to become the largest global producer of gold in 2021. Economic uncertainty has driven the price of gold to an eight year high of over US$1,700 per ounce. Due to the rapid depreciation of the Australian dollar over the first half of 2020, the price of gold has also reached an all-time high in Australian dollar terms, at over AU$2,700 per ounce.

Demand for gold as a safe-haven asset has surged amid unprecedented economic uncertainty. In addition to the COVID-19 pandemic, the stunning magnitude of money creation by central banks around the world has driven investors to reduce currency exposure through holding precious metals. Lower global interest rates have reduced bond yields, lowering the opportunity cost normally associated with investing in physical gold.

COVID-19 has had a mixed effect on the operations of Australian gold miners. Lower oil prices have significantly reduced operating costs for firms by lowering energy costs associated with ore extraction and processing. Some gold mining firms in Western Australia have been disrupted by bans on fly-in fly-out (FIFO) mining employees, due to COVID-19 containment regulations. Despite the disruption of COVID-19, Australian gold mine output is expected to increase by 4.3% in 2019-20, according to the Office of the Chief Economist.

The outlook for the Gold Ore Mining industry over the next five years is positive, despite an anticipated decline in gold production volume. Gold mining revenue is forecast to increase at an annualised 2.0% over the five years through 2024-25, to $21.1 billion. Profit is projected to decrease over the period due to higher costs associated with contractor services, purchase costs and other operating expenses.

IBISWorld reports used to develop this release:

Related IBISWorld company reports:

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