The high-stakes game of mining

IBISWorld analysts have released a report listing the winners and losers of the Global Financial Crisis, with resources in for a rough ride in 2009-10.

While a Chinese wall has shielded Australia from the effects of the global recession, the growth of the Australian resources industry could hinge on the high-stakes game of supply contract negotiations, according to IBISWorld’s recently released Industry Winners and Losers of the Global Financial Crisis, IBISWorld macro-economic briefing report.

According to the report, despite dramatic falls in the market prices for key commodities, industry revenue was partly protected by large annual supply contracts that were signed shortly before the prices nosedived.

Many of these contracts expire between April and June 2009, creating a high-stakes period of negotiation between miners and their customers.

“The global economic crisis has cut industrial production levels in many of Australia’s commodity export markets at the same time as many major Australian mines have increased their mining production capacity due to investments made during the commodities boom,” according to IBISWorld’s macro-economic briefing report.

“This imbalance has given considerable bargaining power to buyers, with forthcoming iron-ore contracts expected to be at least 30% lower in price (falling from around US$140 to US$90 per tonne) than the contracts they will replace.”

For coking coal, the 2009-10 contracts with Japanese steel mills have fallen from around US$300 to US$129 per tonne.

“Despite the large price fall, this is still regarded as a strong outcome for Australian miners,” IBISWorld analysts said.

“The price, which is most often quoted in US dollars, still represents a significant profit margin, as Australian miners can produce coal for US$50 per tonne.

“With steel mills operating at as low as 40% capacity, the question is how much iron and coal will be demanded on the spot market throughout 2009-10.”

As a result of uncertain demand levels in the short and medium term, Australian resource companies are seeking ways to reduce capacity, according to IBISWorld.

“Both Rio Tinto and BHP Billiton will benefit from their agreement to establish a production joint venture covering the entirety of both companies’ Western Australian iron-ore assets, through greater negotiating power in iron-ore contracts, particularly when selling to key Chinese markets.”

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