Australia is such a lucky country... We have some of the best resources on the planet; are closest to the fastest growing economies in the world; have low sovereign risk; world class technologies and supply chain infrastructure; and of course, plenty of good old Australian entrepreneurship and a 'can do' attitude.
However, reading the daily media you would think that the resource sector is about to close and is the root cause of our economic and government budget challenges. While most of the world struggled during and post the GFC, Australia continued to grow and has maintained low levels of unemployment and debt compared to the rest of the world.
While in the short-term, some commodity prices are lower than their post record highs, the outlook for most commodity prices including coal, alumina, uranium, zinc, gold and nickel are positive. Even at $60-$70/t for iron ore, the majority of Australia's iron ore industry is very profitable.
Ongoing urbanisation and the growth of Asia will drive energy consumption of which LNG and coal will be a significant mix. Australia has built (or is finishing) a world class LNG and coal sector that few countries will be able to replicate in the short to medium term.
The demand for steel continues to grow as Asia urbanises and the demand for next phase metals such as aluminium and copper is now following. In the long-term, Australia is also well-positioned to take advantage of an Indian transformation that will be analogous to that seen in China over the recent past.
For most of the last decade, extremely high prices have rewarded those who focused on driving volume at all costs. More recently there has been a period of persistently high prices where cost control started to come into focus, but prices were still high enough to hide a multitude of sins. The industry is now focused on lowering production costs.
In some ways the more difficult changes will be faced by the employees of the resources sector. Over the last 10 years a culture of entitlement has developed. Rosters have become lighter, pay higher, and unemployment has been extremely low. This generation has only known the good times. Over the next couple of years, organisations across Australia will be forced to find ways to obtain more output for every dollar they pay to their employees. People will adapt, but not without a period of friction as realisation slowly dawns.
Governments also benefited from capital investment, royalties, increased jobs and higher tax receipts. With lower commodity prices the resources sector has now become an easy ‘escape goat’ for governments’ budget deficits as they seek to cover the increasing costs of areas including health and education.
One area of concern is the decrease in exploration spending at both the major and junior end of the market. Contrarian investors prepared to take risks could find great value in the Australian resources market.
Operations have never needed more people or spent more money. To give an idea of scale, iron ore production has risen more than four-fold from approximately 160mtpa in 2000 to approximately 700mtpa at present. There will be some belt-tightening in operations as long as low commodity prices persist, and some smaller marginal operators will strike difficulties, but the boom has raised the baseline level of economic activity in Australia and those changes are here to stay.
The resources industry in Australia has experienced a once-in-a-generation change over the last 15 years. The industry is now dramatically larger than it once was. The froth of the construction boom is quickly subsiding however, and the industry as a whole will need to take every opportunity to do more with less whilst it waits for the next wave of global development.
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