WA produces a diverse array of minerals, yet one commodity dominates the sector.
IF there was a pivotal moment in the development of Western Australia’s resources sector during the past 30 years, it was in April 2003, when Andrew Forrest unveiled his audacious plan to create the third force in iron ore.
He took control of small ASX-listed company Allied Mining and Processing, renamed it Fortescue Metals Group, and set out to take on the world.
Mr Forrest’s simple thesis, which proved correct, was that the impending China boom would change the world economy and create unprecedented opportunity.
FMG’s big rivals were not tuned in to the same opportunity.
In fact, they were knee deep in what became two big failures.
In 2003, BHP was struggling with its Boodarie Iron project in Port Hedland, while Rio was building its HIsmelt pig iron plant at Kwinana.
They were the latest of many ill-fated attempts to value-add to WA’s iron ore.
BHP shut down Boodarie in 2004 at a cost of about $2.5 billion and Rio shut HIsmelt in 2008, at the height of the GFC.
While the GFC had deep reverberations around the world, it caused only a minor blip in WA, where the focus was on ramping up iron ore production as fast as possible and preparing for a wave of big gas projects.
The iron ore expansions that kicked off the mid 2000s were the start of a decade-long boom that is reflected in iron ore’s status as by far the biggest export earner in WA.
The total volume of iron ore production in WA hit an all-time high of 855 million tonnes last year, with more than 80 per cent sold to China.
That is more than four times the industry’s production in 2003, when Mr Forrest created FMG, and nearly double its output a decade ago.
The value of sales last year was $126 billion, the second highest recorded.
Notably, that equates to more than half of all mineral and petroleum sales from WA last year.
It’s a similar story for employment: the iron ore sector accounted for half of the 117,970 full-time equivalent (FTE) jobs in the sector last year.
That’s a dramatic change from 30 years ago, when the entire resources sector was much smaller (with sales of $12.4 billion) but more balanced.
In 1993, gold and iron ore each accounted for about one quarter of total production while alumina, petroleum and liquefied natural gas (LNG) were also big contributors.
Shrinking sector
Gold now accounts for just 7 per cent of total resources sector sales.
The value of gold sales has increased, to $17.8 billion, but it’s been overwhelmed by the much faster growth of other commodities.
Highlighting its underperformance, the volume of gold production has barely grown over the past 30 years: it has increased by just 17 per cent to 214,000 kilograms, according to state government data.
For every new gold discovery and every new mine developed there is another that exhausts its reserves or reaches the end of its economic life.
The alumina sector has also become less prominent even though the two producers – Alcoa of Australia and South32 subsidiary Worsley Alumina – have expanded their operations.
The total volume of production has grown by 70 per cent to 13.4 million tonnes while the value has more than tripled to $6.8 billion.
However, that is just 2.7 per cent of total sales across the resources sector.
Growth commodities
The growth in resources value has been overwhelmingly in three areas: iron ore, LNG and so-called critical minerals, which encompass lithium, nickel, copper, rare earths and vanadium.
In the iron ore sector, Rio Tinto remains the largest producer, targeting shipments of between 320mt and 335mt from its Pilbara mines this year.
It is followed by BHP with annual output of about 280mt.
Production from Rio and BHP has been fairly static in recent years as they seek to bed down the big investments they have implemented over the past decade while focusing on value over volume.
There have been many twists and turns getting to this point, most notably BHP’s proposal in 2007 to merge with Rio to create the dominant supplier of seaborne iron ore.
It was lured by the prospect of big operational synergies, including access to Rio’s port facilities at Dampier and Cape Lambert, which are much more attractive than the congested inner harbour at Port Hedland.
The merger was vigorously opposed by regulators around the world, with BHP eventually conceding defeat in 2010.
BHP’s next step was to propose an extraordinarily ambitious outer harbour development at Port Hedland; but it eventually walked away from that plan as well.
The Pilbara now has three very large iron ore exporters.
FMG achieved ‘first ore on ship’ in 2008 and currently produces about 190mt per year.
With production starting last month at its Iron Bridge magnetite project, that number is set to rise.
Roy Hill Holdings – majority owned by Gina Rinehart’s Hancock Prospecting – has added substantially to the industry’s capacity, with annual production of over 60mt.
The Chris Ellison-led Mineral Resources is vigorously pursuing plans to join the line-up of big producers.
It is investing $3 billion in its Onslow iron ore project and has a joint venture with Hancock to build a new shipping berth at Port Hedland.
Gas projects
The LNG sector has grown to become the state’s second largest by value, accounting for about 20 per cent of WA’s total resources production.
That reflects the expansion of Woodside Energy’s North West Shelf plant and the development of the mammoth Gorgon, Wheatstone, Pluto and Prelude projects.
The growth of the critical metals sector has been highlighted by the rapid emergence of lithium as the state’s fourth largest commodity export, with sales last year of $16.2 billion.
Lithium is currently sold as lightly processed spodumene concentrate.
The value of lithium sales is set to expand rapidly, as a result of three trends.
Existing producers, led by Talison Lithium and Pilbara Minerals, are making big investments to expand their capacity while Mineral Resources is also expanding its operations.
In addition, new mines are being developed, with Liontown Resources and Covalent Lithium set to be the next large-scale producers.
More significantly, the spodumene concentrate will soon be processed into higher-value lithium hydroxide.
Tianqi Lithium and Albemarle Corporation (joint owners of the Talison mine) are currently commissioning lithium hydroxide refineries at Kwinana and Kemerton, respectively, and both intend to expand capacity.
Albemarle is the most advanced on that front, announcing early this month it would invest up to $US1.5 billion ($A2.2 billion) to double the capacity of its Kemerton refinery.
Covalent Lithium (half-owned by Wesfarmers) is on track to become the third lithium hydroxide producer, with its refinery also under construction at Kwinana.
Adding to the critical minerals boom is the revival of nickel, which accounted for $5.7 billion of sales from WA last year.
The price of nickel is highly volatile, with the value of nickel production in WA peaking at $6.9 billion in 2007 and plunging to just $2.1 billion in 2016.
That was around the time BHP demerged its smaller assets into a new company, South32, but was famously left with its ‘unwanted child’, Nickel West.
BHP was on the brink of closing Nickel West before realising its value in the battery metals revolution, with lithium batteries actually containing more nickel than lithium.
It has since poured money into both its nickel mines and the development of a nickel sulphide refinery at Kwinana, to produce the high-grade crystals needed by its customers.
The sector is poised for more growth, with BHP recently completing the purchase of OZ Minerals.
As well as existing mines in South Australia, OZ’s biggest attraction was its West Musgrave copper and nickel project in the eastern Goldfields.
With a price tag of $1.7 billion, it’s one of the largest mining projects under development in WA.
Another more ambitious proposal has been put forward by two established nickel miners: ASX-listed IGO and the Forrest family’s Wyloo Metals.
They are looking to invest up to $1 billion in a new nickel refinery at Kwinana and an accompanying plant to produce precursor cathode active material (PCAM), for use in lithium batteries.
The critical minerals sector is poised to be even more significant in future, with Lynas Rare Earths and Iluka Resources both investing more than $1 billion to expand their operations and Hastings Rare Earths keen to join them in production.
