High dollar and commodity price slump contribute to slow rate of export growth

WA has increased its lead as the country’s largest exporter, but the rate of growth has slowed.

WESTERN Australia has continued its run as the nation’s largest exporting state with its income now accounting for almost half of the country’s total export revenue, predominantly due to its growing iron ore production.

However, it’s that reliance on iron ore exports that has led to WA experiencing a reduced growth rate in the past year as miners tackle lower commodity prices compounded by the high Australian dollar.

For the year ending June 2012, WA’s export earnings reached $121 billion, 46 per cent of Australia’s total. It’s an impressive improvement on the 35 per cent share WA held three years ago, and an 8 per cent increase on the $113 billion export revenue in 2010-11.

While the growth is positive, the rate of growth has slowed significantly. To give a comparison, the state’s export income grew by 33 per cent in the 2010-11 financial year.

To highlight the impact on revenue even further, the volume of goods shipped during the past financial year increased by 5 per cent; a year earlier, when revenue growth was much higher, there was virtually no growth in the volume of goods exported.

Not surprisingly the crux of the slowdown has come from the state’s iron ore sector. Iron ore exports account for more than half of the state’s export income and were valued at $62 billion last year.

While the value of the industry is continuing to grow (at a rate of 8 per cent in the past year), this growth has been at significantly lower levels than previous years. In 2009-10, for instance, the value of WA’s iron ore exports increased by 47 per cent.

Bringing in the most income are Rio Tinto and BHP Billiton, which account for 75 per cent of the commodity’s total exports. Their iron ore operations alone are enough to keep them at first and second place respectively on the WA Business News list of the state’s biggest exporters.

When other projects are added to the mix, such as BHP’s alumina, petroleum and nickel operations, and Rio’s Argyle diamond mine, the dominance of the ‘big two’ becomes even clearer.

BHP nudges Rio out of the top spot as the biggest exporter overall with its export revenue of $27.8 billion, accounting for almost a quarter of WA’s total, according to data compiled by WA Business News.

Rio Tinto is not far behind with annual export revenue of $26.2 billion.

The pair’s iron ore operations account for the largest chunk of income, however; BHP’s iron ore projects accounted for $20 billion (73 per cent) of its annual revenue.

And it’s there that the problem lies when growth slows.

The decline in iron ore prices and the impact on mining companies has been well documented; but adding salt to the wound has been the continuation of the strong Australian dollar, which hit a peak of $US1.09 in July 2011 and has remained at high levels since.

Not only are miners now getting paid less for their product, but those earnings have been cut back even further during the exchange of US export dollars into Australian currency.

On the back of the challenging conditions, BHP has delayed its expansion of the Port Hedland outer harbour, instead focusing on developing capacity in the inner harbour. The decision has delayed the requirement for investment of about $20 billion.

Fortescue Metals Group has also taken heed of economic changes in the sector and drastically scaled down expansion plans, from a target of 155 million tonnes per annum by the end of March next year to 115mtpa.

All the major players are still planning to increase production, however, as the increased delivery of product is imperative if the companies plan to remain in growth phase. 

Atlas Iron provides a good example of a miner having to produce more to keep its finances growing in the past year. In FY 2012 it increased iron shipped by 22 per cent (bringing the total to 5.6mt), while the revenue increase was less than a quarter of that at 5.6 per cent.

Further adding to the pressure on miners is the limited capacity of the state’s ports. 

The bulk of the state’s mineral exports (amounting to about 460mtpa) are shipped out of the Pilbara. 

Investment is needed to expand capacity in the region’s ports as they’re already under pressure, but, as has been the case with BHP deferring its outer harbour expansion, falling iron ore prices are making such proposals less attractive.

Meanwhile, both Geraldton and Esperance ports are already at capacity with no firm plans for significant port expansions.

WA’s dominant iron ore sector may be navigating challenging conditions, but gold and oil and gas exports have picked up the slack.

The value of the state’s gold and LNG exports were the fastest growing of any sector during the past year. The value of LNG exports increased 19 per cent to 8.6 billion in 2011, but that was driven more by an increase in prices than increased export volumes.

Production of LNG fell 3 per cent to 16mt over the year with maintenance on the North West Shelf LNG plant a contributing factor, according to the federal government’s Bureau of Resources and Energy Economics.

The joint venture company has kept its third placing on the list of the state’s biggest exporters ranked by annual revenue, however, despite its turnover decreasing by $2 billion.

Significant growth is forecast for LNG exports for the current financial year, however, with Australia’s total exports forecast to increase 21 per cent, buoyed by production from Woodside’s Pluto facility.

Production began at Pluto earlier this year, which has a planned total capacity of 4.3mtpa – figures likely to improve Woodside’s current standing of sixth on the list of the state’s biggest exporters.

Sitting near the top of the table, as it consistently has done over the years, is the state-owned Gold Corporation, or The Perth Mint as it’s more commonly known, given the refinery and minting facility is its main trading entity.

The company recorded a 42 per cent increase in profits for the past financial year as the price paid for gold continued to improve over the period.

The impact of the eurozone crisis has prompted an appetite for more stable options for investment, pushing the price of gold up but also increasing the amount being exported from WA.

Gold exports rose 16 per cent to $16 billion in 2011-12 and for the first time the UK has taken over from India as WA’s key gold export destination – indicative of the European central banks’ recent preference for buying gold.

Given that exports from WA’s resources industry make up 92 per cent of total exports, it’s not surprising companies operating in that industry dominate the biggest exporters list.

Iron ore producers Fortescue Metals Group and Cliffs Natural Resources make it into the top 10, with Cliffs’ performance specifically boosted by a $320 million expansion of its Koolyanobbing operation.

Aluminium producer Alcoa of Australia has remained a significant exporter, but its performance has been knocked by the price of the commodity trending downwards over the year, removing much opportunity for revenue growth. 

WA’s nickel, copper and alumina exports make up the remaining percentage of precious metals exports, with the value of each remaining relatively stable given depressed commodity prices.

That may increase in the current year, however, as Worsley Alumina, which is 86 per cent owned by BHP Billiton, begins production from its expanded Marradong operation.

About $US3 billion has been spent on expanding the mine’s refinery; increasing capacity by 1.1mtpa to a total of 4.3mtpa.

The only non-resources company considered a top exporter is grain operator CBH Grain with revenue of $2.8 billion over the last financial year. Its performance will more than likely improve in the current financial year as the company benefits from a bumper winter harvest.

CBH is an anomaly among the best performing export companies, with another outside the resources sector, shipbuilder Austal, struggling to retain its slice of the export pie.

The company has been hit by increasing challenges in the manufacturing sector such as higher labour costs alongside a downturn in the commercial vessel market.

A review of its Henderson manufacturing hub prompted a shift in focus to defence vessels, but that resulted in a 63 per cent decrease in revenue from Australian operations to $49 million.

The company is also increasing manufacturing at its base in the Philippines, and has subsequently fallen from the ranks of the state’s biggest exporters.

Underpinning WA’s export trade is, of course, demand from China. While there’s much speculation about that demand dying off, it’s speculation not yet reflected in export figures.

Demand from China for iron ore has kept the country as WA’s largest export market; it accounted for 69 per cent of all iron ore exports and 46 per cent of all exports. China was also the largest market for the state’s crude oil exports with $3 billion worth exported to the country.