Chief Economist indicates the bottom of the mining bust

A report from the Department of Industry Innovation and Science’s Office of the Chief Economist states the bottom of the mining bust is here.

The report outlined an overall drop of around 12 per cent in Australia’s resources export earnings year on year, noting the commodity price decline playing a large part in the overall export earnings decline.

However the Department is still positive on the industry, recognising the shift from a capital and investment heavy construction boom into a period of production.

“Australian producers were well-positioned to meet the projected growth in demand as production starts to increase following a long period of investment,” the report said.

“The Australian resources and energy sector is transitioning decisively into the production phase of the resources boom,” the Department’s Chief Economist Mark Cully added.

“Australia’s resources and energy commodities exports are projected to increase rapidly in response to a substantial increase in production capacity, particularly in LNG and iron ore.”

He went on to state, “The production phase of the boom, which is yet to peak, is expected to last a lot longer than the price and investment phases of the boom (which were eight and six years respectively). The production phase is largely underpinned by $400 billion of investment that was channelled into resources and energy projects between 2003 and 2014.”

Australian Mining investigations have previously pointed to the bottom of the mining decline being reached.

The new report outlined positive guidance.

“Over the medium term, the outlook for the Australian resources sector is largely positive,” the report said.

“The prices of several commodities, in particular iron ore and coal, are projected to increase moderately towards the end of the outlook period. In addition, production and export volumes are projected to increase as the recent investment in the sector contributes to increased output.

“The strongest growth in export earnings is projected for LNG, where the development of new projects on the east coast of Australia is projected to contribute to a near tripling of LNG exports,” it said.

“Australia’s earnings from resources and energy exports are projected to reach $235 billion (in 2015-16 dollars) by 2019-20. Earnings from resources exports are projected to total $138 billion (in 2015-16 dollar terms), while earnings from energy are projected to total $97 billion in 2019-20.”

The question of when mining will begin its upswing again is one of contention.

Current predictions range from the last quarter of 2015 through to mid-2016, with some even positing a 2017 recovery timeline.

According to JP Morgan, there is likely to be “some additional EPS cuts for miners near term, but again, not a step change.

“We believe that the bulk of EPS downgrades are behind us given the latest consensus projections of -44% year-on-year EPS growth for miners in 2015.”

Westpac’s chief economist says the price of iron ore won’t see a recovery until at least 2016.

Westpac economist Justin Smirk said with demand out of China unclear coming into the New Year, and high volumes of iron ore being exported to the country, price volatility would continue.

He added that the start-up of Gina Rinehart’s Roy Hill mine later this year could also have a downward effect on the price of iron ore as the operation is poised to be a large, cheap supplier.

Smirk said adjustments would come as some of the marginal Chinese miners left the market but this was not happening “as fast as some people anticipated”.

According to IBISWorld the 2015/16 financial year is pegged to quickly ratchet up, growing 7.1 per cent, with expectations for this upwards trend to continue into the following financial year with 2016/17 predicted to record an 8.4 per cent increase in revenues as recovery continues.

Its reports into the next few years have outlined how "growing output is forecast to support division growth in the next five years, which is forecast at a compound annual rate of 4.2 per cent, to reach $285.4 billion in 2019/20".

However, taking the whole resources sector into view, some pundits believe we still have a way to fall.

In terms of individual commodities, the report was mixed.

“In 2016, the price of iron ore is forecast to fall a further 3 per cent to average US$51 (FOB),” it said.

 “A key risk to the price is further currency depreciation of the major iron ore producing countries against the US dollar, particularly the Australian dollar and Brazilian real. Further currency depreciation will help maintain cash margins, because the price of iron ore is denominated in US dollars, and may delay cuts to supply.”

For Australia, it forecast a slowing market, “from 15 per cent annual growth recorded from 2010 to 2014 to around 4 per cent a year over the medium term.”

“Roy Hill is the last major iron ore mine under construction in Australia and is scheduled to open in the December quarter 2015. As production at Roy Hill ramps up and the major Pilbara producers reach maximum capacity over the next couple of years, growth in Australia’s output and exports is projected to slow considerably.”

In terms of coal – both coking and thermal – it was not predicted to recover significantly until around 2017.

To keep up to date with Australian Mining, subscribe to our free email newsletters delivered straight to your inbox. Click here.