Four key challenges ahead for the Australian mining sector

While the mining sector has experienced tough times it seems there are calmer waters ahead, according to trade credit insurer Atradius.

“Australia is one of the world’s leading mineral resources nations, ranking in the top two to five countries in the world, depending on the commodity,”said Mark Hoppe, managing director ANZ, Atradius. “2014 saw the peak of the revival in the Australian mining industry.

“The main driver for this revival was the rapid urbanisation and industrialisation of emerging economies in Asia, especially China, which dramatically transformed global commodity markets during the 2000s.”

In this period, a strong demand for resources propelled commodity prices to record levels, supporting rapid expansion of global energy and minerals supply.

The initial surge in resources investment was driven by coal and iron ore projects, largely to meet demand for steel in China. China became rapidly by far Australia’s largest export partner and commodities dominate the rankings of main export sources.

China consumes about 47 per cent of the world’s base metals (up from 13 per cent in 2000) and is the world’s largest importer of iron ore, coal, copper, bauxite, and nickel. The main consumers of Australia’s major commodities are Chinese steel mills or power plants.

“Since its peak in 2014, mining has had its struggles but is now showing more positive signs. However, mining operations need to be aware of and prepared to face a number of key challenges in the coming months and years,” Hoppe said.

Atradius has identified four key challenges facing the mining sector:

1. Rebalancing of supply and demand. In the next five years analysts and the government expect the iron price to stabilise. This will make income and returns far more predictable. Businesses will be able to better plan for costs making lending to, and investing into, mining companies attractive again.

2. High profile casualties. High profile causalities occur because of high inflexible company costs based on the expectation of commodity prices staying high. When commodity prices dropped they were unable to adjust quickly enough. Going forward we expect to see fewer well established mining companies going into administration.

3. Uncertainties about the Chinese government’s strategy. Uncertainty surrounds where China will source steel and raw materials (iron ore and coal) . Will it be domestically or internationally? This decision will impact mining companies in Australia.

4. Focus on costs. Flat price forecasts have meant we’re starting to see listed miners publicly state their intent to drive down costs and debt. There’s also potential for successful junior miners to be targeted in mergers and acquisitions.

“Mining operations and those looking to do business with miners should be aware of the coming challenges so they can develop a strategy to overcome them and continue to trade confidently,” Hoppe added.