Email of the day (1)
Comment of the Day

July 23 2012

Commentary by Eoin Treacy

Email of the day (1)

on Australia and commodities:
“Thought you might be interested in the report below. Coming from an economist I'll take it with a grain of salt.”

Eoin Treacy's view Thank you for this interesting article. Today's Mineweb quoted the same report and carries some additional information. Here is a section:

Costs have risen fast and potential profits are being dialed down as commodity prices deflate and analysts reassess both shorter and longer term commodity demand from emerging Asia. That doesn't necessarily say that some of the next found of mega mining projects may not get the green light," said Deloitte Access.

Among the major mining projects now underway are Newcrest's A$1.9 billion expansion of the Cadia East gold mine near Orange NSW, Xstrata's A$1.1 billion Ulan Underground coal mine; the $900 million upgrade of the Newcastle coal terminal; BHP Billiton's $4.2 billion Caval Ridge coal project in Queensland and the five and sixth stages of its Rapid Growth iron ore project, costing $6.7 billion and $3.2 billion, respectively, in Western Australia; and Fortescue's $4 billion Solomon iron ore project also in Western Australia.

Nevertheless, the report noted, "Mining companies are making it clear the current spike in investment is due to decisions taken a while back, whereas we are getting few new mining mega-projects across the line."

South Australia's resource-related economic pick-up is threatened in particular if the Olympic Dam expansion gets pushed backed further in time. "The state is blessed with a world-class resource in Olympic Dam, and the economics will stack up at some stage for the mining sector to invest something like $20 billion (perhaps even $30 billion) to bring that potential to fruition."

Commodity demand growth estimates raced ahead in the last decade as commodity prices rallied. Ambitious expansion plans were adopted as miners began to compete for market share particularly outside the iron-ore sector. However, China's gradual evolution from an infrastructure driven growth model to a more consumer oriented one is forcing a reassessment. The absolute level of demand, having more than doubled in the last decade is unlikely to decline meaningfully but the pace of demand growth is declining. This has put downward pressure on industrial metal prices and mining shares.

Australia's iron-ore, coal and natural gas industries have grown considerably in the last decade. However, it would be rash to expect these sectors to continue to expand at the same pace over the next decade, when the pace of demand growth is already easing. Nevertheless, the raw materials sector is likely to remain a highly significant employer over just about any timeframe.

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