Australian mining powers on

THE major factor affecting the performance of the mining industry will continue to be the pace of world economic growth, the competitiveness of Australian producers and the value of the Australian dollar, according to IBISWorld.

The major factor affecting the performance of the Mining Industry will continue to be the pace of world economic growth, the competitiveness of Australian producers and the value of the Australian dollar, according to IBISWorld.

The demand for a range of metal and energy products is heavily dependent on trends in world economic growth.

Slower growth ultimately both reduces the rate at which the demand for minerals expands and holds down the prices of a range of minerals.

Most of the minerals that Australia producers export to markets in our region find their way into manufactured goods (metals and a range of other products) destined for other markets.

As a result, industry performance is not only sensitive to economic growth in our markets, but also to world economic growth.

Minerals are traded on global markets.

The generally undifferentiated nature of the products and the large number of producers (in most markets) mean that suppliers are price takers – they cannot directly influence market prices to any great extent. This is the case even in oil markets, where the OPEC cartel seeks to influence prices.

Typically, it can only do so for relatively short periods of time, since non-OPEC producers react to price signals and supply/demand imbalances. However, a protracted period of low oil prices, as in the 1990s, leads to cuts in exploration spending and hence can hamper the ability of producers to respond to price signals, especially if demand is growing strongly at the same time.

In markets such as these, the most efficient producers reap the greatest gains during period of high prices and high demand and are best-placed to weather periods of low prices and weak demand.

The supply of most minerals is relatively price elastic, which means that relatively small rises in price tend to result in proportionally larger increases in supply.

Most Australian mining companies operate low down on the cost curve, indicating that they are both globally competitive, and well-placed to prosper in such a market.

Most minerals prices are expressed in $US (both in contracts and on the spot market), making industry revenue and gross product sensitive to swings in the exchange rate.

The performance of the Mining Industry surged over 2004-05 to 2006-07, riding on sharply higher prices and increased output.

Production is expected to continue expanding over the outlook period, as producers continue to supply rapidly growing markets such as China and India.

Coal and iron ore producers will be amongst the main beneficiaries of China’s rapidly growing demand for mineral resources. However, mineral commodity prices are expected to decline during the outlook period, reflecting strong growth in supply from mining operations worldwide.

Higher output and a somewhat weaker exchange rate is expected to offset the negative impact of lower prices on revenue in 2007-08 and 2008-09, but beyond that time, real industry revenue is expected to decline.

Overall, Mining Industry revenue is expected to expand at an average annual rate of about 1.3% over the outlook period, with industry gross product rising by about 1.5% (mainly in response to cost containment). However, it must be remembered that this subdued performance follows a period of very strong growth.

IBISWorld

www.ibisworld.com.au

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