West is best: profiling Western Australia’s mining boom

Scarlett Evans 27 May 2019 (Last Updated May 15th, 2019 11:26)

Mining has long been a leading source of income for Australia’s west coast, and now new research from analyst firm IBISWorld has indicated the state is heading towards a new mining peak. Scarlett Evans looks at the projects driving the region’s mining sector, and the obstacles still faced in its ascent.

West is best: profiling Western Australia’s mining boom
While new exploration is mainly directed at gold and nickel/cobalt, the state is also expanding into lithium and vanadium, seeking to capitalise on the global interest in green power alternatives and new battery technologies.

Western Australia (WA) is a world leader in the production of minerals and petroleum commodities, with these sectors bringing in 92% of the state’s income from merchandise exports between 2015 and 2016. Figures from the Government of Western Australia show that between 2017 and 2018, the mining industry accounted for 30% of WA’s gross state product – and the sector is only anticipated to continue growing, with an influx of investments coming in over the past two years and record sales figures between 2017 and 2018.

Research from analyst firm IBISWorld says the sector is likely heading for a return to peak conditions seen prior to 2011-2012, with iron ore, lithium, liquefied natural gas (LNG), gold and battery minerals identified as the areas with most lucrative growth potential. But just what does the future of WA’s mining sector look like?

The only way is up

According to Jeff Haworth, Executive Director of Geological Survey and Resource Strategy for the Department of Mines, Industry Regulation and Safety, as of March this year “WA has a pipeline of resource projects worth an estimated $112bn, representing an increase of almost $5bn from the September 2018 estimate.”

The state’s continued dominance is an exception to the country’s wider mining landscape, as overall mining investment has been declining since its 2012 peak. By contrast, it has remained at a steady 52% in WA and minerals exploration expenditure has in fact grown, rising by 16% in 2017-2018.

According to IBISWorld, between 2017-2018 iron ore sales in WA reached a record 826 million tonnes, while the state’s overall iron ore industry recorded $6.1bn in new project investment, as well as $5.5bn in planning stage investment. Such a growth was predominantly driven by a rising demand from Asian markets and high-profile operations in the region, including BHP’s South Flank, Fortescue Metals Group’s Eliwana and Rio Tinto’s Koodaideri projects.

While new exploration is mainly directed at gold and nickel/cobalt, the state is also expanding into lithium and vanadium, seeking to capitalise on the global interest in green power alternatives and new battery technologies. Lithium production is anticipated to hit 274,000 tonnes between 2018-2019, with growth bolstered by projects such as Altura Mining’s operation at Pilgangoora and Kidman Resources’ Earl Grey Lithium mine. According to IBISWorld, lithium exports from Western Australia are expected to generate over $1.1bn in revenue in 2018-19, up from $0.9bn in 2017-18.

Haworth says the value of projects under construction, or in the committed stage of development, is estimated at $25bn and the value of planned projects is estimated to have increased to $88bn. Yet despite the promising figures, he says that the scale of investment between 2011 and 2014 is “unlikely to be repeated soon.”

But he added that substantial investment had been seen in lithium and other battery materials, while the more traditional gold, petroleum and iron ore sectors “continue to be a target for mergers and acquisitions, as well as new and expanded projects.”

Could anything stop the rise?

Although the wave of new projects seems to imply the sector’s ascent is unstoppable, the road to another mining boom is not entirely clear. Earlier this month the EPA said it would require all new projects emitting more than 100,000 tonnes of carbon a year to fully offset its emissions, arguing that Australia is too emissions-intensive to satisfy its 2030 Paris Agreement targets. The new curb was criticised by the Federal Government as it was implemented without proper consultation, while industry members argued it threatened to tie up major projects in court disputes and derail developments worth billions of dollars. Even though the measure has now been retracted for review, Michael Blakiston, a partner at law firm Gilbert + Tobin, says it grabbed headlines “for all the wrong reasons”.

“It brings into question the stability and sovereignty in the state when considering investment decisions,” he says. “If you’re a foreign investor looking at our country, you would say it’s a risk you hadn’t anticipated. In a state that’s reliant on foreign capital for a host of commodities, anything that upsets the perception of stability is of concern.”

While the projects that would have been impacted by the guidelines were minimal, Blakiston argues that the indirect effect of throwing up uncertainty and discord in the state could be severe in terms of investors’ faith in the sector’s stability.

“When you have an independent arm of government that says they’ll apply a measure that the main body of government says is not their policy, you create a perception of complete disconnect.”

According to Blakiston, such policies should be implemented over time to allow corporations to make the necessary changes.

“I don’t think the mining industry is trying to shirk responsibility about carbon and how to deal with it,” he says, “I think you need to create policy setting where over time we can work our way down to carbon emissions that we find satisfactory. But this takes time, and a huge investment. With alternatives and carbon capture – you can have confidence that we will get to this point and the best way to do that is to incentivise people, not to stall projects.”

The risks of a trade war

The Government of WA predicts mining exports in the region will dip in the coming years as LNG projects reach their end and Chinese demand for iron ore declines, and so recommends that the state looks to broaden its economic activity to support longer-term growth.

The impact of Chinese demand was also mentioned in the report from IBISWorld, specifically highlighting the potentially damaging effects of the US/China trade war.

“China is a major market for Australian mining exports, particularly iron ore and lithium,” IBISWorld senior industry analyst Jason Aravanis wrote in the report. “Should the global economy enter a downturn in response to the significant tariffs introduced in 2018, the Australian economy is likely to be hit hard.”

Blakiston also says that the tariffs are particularly significant for Australia as an exporter of LNG and iron ore, saying “there is a real flow-on effect of the tariffs. A slow demand for metal means a slow demand for raw materials – which means it will affect us.”

Other predictions from industry members are more optimistic though. Fortescue Metals Group CEO Greg Lilleyman said he did not see a big reduction in Australia’s iron ore exports to China over the next decade, saying “We have a good view, and a very strong view of ongoing demand for our products in China.”