Lithium optimism as iron ore fire cools

In April this year, Western Australia celebrated another record year of resources and energy sales, reaching new highs of $246 billion for 2022 compared to the previous year’s $231 billion.

At the time, Mines Minister Bill Johnston said he was running out of superlatives to describe the results.

But whether the trajectory can be maintained – as commodity prices ease and miners work harder to maintain returns – remains to be seen.

According to the Department of Industry, Science and Resources’ Resources and Energy Quarterly September 2023, national exports are expected to grow further in volume terms.

However, forecasts from the paper indicated that revenues won’t necessarily keep pace.

“Australian exports are forecast to fall to $400 billion in 2023-24, down from a record $467 billion in 2022-23,” the report says.

“Exports are forecast to decline further to $352 billion in 2024-25.”

In part, this sentiment hinges on the outlook for China, Australia’s biggest trading partner and the destination for iron ore, WA’s main revenue driver.

“Weaker economic growth in China has led to bouts of weakness in iron ore and base metal prices, but recent Chinese stimulus measures and low global inventories of most base metals have helped limit price falls,” the report says.

Adding to the narrative, the quarterly report also suggests continued demand for metals that will be required for batteries, in tandem with a concerted global push to ween off a reliance on fossil fuels.

In conversation with Business News, University of Western Australia Business School professor Allan Trench drew on a pop culture reference from the movie This is Spinal Tap to detail the global macroeconomic environment underpinning resources exports.

“One of the classic scenes is the amplifier that goes to eleven … I think the global economy, I’d probably give it a four out of ten at the moment,” Professor Trench said.

“People are still worried about interest rates, threat of recession… That’s a global macro four out of ten.

“But the big thing for WA, of course, is … [we’ve got] the clean energy transition and critical metals. And I think that’s an eleven. That’s a Spinal Tap eleven.”

Domestic capacity for lithium refining at this stage mainly refers to processing locally mined spodumene concentrate into lithium hydroxide and is considered a considerable growth opportunity for Australia.

“So far, lithium remains a central element in the improved battery chemistries and demand outlook for lithium remains strong,” the Resources and Energy Quarterly September 2023 says.

“In volume terms, Australian exports are expected to growth further, with lithium hydroxide making up an increasing share of exports.”

WA has latterly risen to become the world’s biggest supplier of spodumene concentrate, with a pipeline of new projects all eager to get off the line.

WA’s output accounted for 47 per cent of global supply in 2022, according to WA’s Department of Jobs, Tourism, Science and Innovation.

But after a few years of staggering growth (lithium exports lifted from $5 billion in 2021-2022 to $20.3 billion this year, according to the report) forecasts for the next few years indicate it could be in for a cooling period in the short to medium term.

“The value of lithium exports is forecast to decline to $17.9 billion in 2023-24, and $16.2 billion in 2024-25,” the September quarterly report says.

“The declines will be driven by moderating prices over the period, though prices are expected to remain significantly higher than pre-2021 levels.

“In terms of volumes, spodumene exports are expected to grow at a comparatively slower pace than recent years, which will reflect an increasing share of domestic refining to produce lithium hydroxide.”

Released in June, a report by McKinsey & Company titled Australia’s Potential in the Lithium Market found that Australia has a unique opportunity to push itself beyond exporting raw materials and capitalise on higher potential revenues from selling a refined and in-demand product.

“The opportunity for Australia is twofold: rising lithium demand and the country’s capacity to produce lithium hydroxide,” it reads.

China’s Tianqi and the US’s Albemarle are ramping up lithium hydroxide plants in Kwinana and Kemerton, respectively, and Covalent Lithium – jointly owned by Wesfarmers and Chile’s Sociedad Química y Minerals – is also building a refinery in Kwinana.

Mineral Resources has also signalled its intention to build a lithium hydroxide plant in WA but is yet to put forward concrete plans.

While encouraging, the McKinsey & Co report notes the significant capital costs associated with new projects in Australia and a limited labour pool as major hurdles to making the most of this opportunity.

Iron giant

In September, BHP celebrated a significant and timely milestone: the shipping of 3 billion tonnes of iron ore to China.

“Last month we celebrated a significant milestone: the shipment of three billion tonnes of high-quality iron ore to China,” WAIO asset president Brandon Craig told the Pilbara Summit in October.

“To put that in perspective, that’s enough steel to build 37 thousand Sydney Harbour Bridges.

“The first shipment of BHP iron ore left Port Hedland in 1973 and fifty years later we are still going strong, supplying China and our other global customers with a key input to the steel essential for global economic growth and the energy transition to a lower carbon emission world.

“This milestone is a testament to the importance of our iron ore business, not just to our global partners, but importantly our local communities and partners in the Pilbara.”

The marker came about a month after BHP revealed WA iron ore export revenues had sunk from $US36 billion to $US29 billion for the 2023 financial year, with average realised iron ore prices falling 18 per cent from $US113.10 per wet metric tonne to $US92.54/wmt.

Output was up by 1 per cent to 285mt on a 100 per cent basis.

BHP wants to keep its foot to the floor in terms of ramping up output.

“To achieve production levels greater than 305 million tonnes per annum, we need to invest to debottleneck both port and rail infrastructure,” Mr Craig said.

“We expect getting there will require more substantial investment in our mines, and would require an additional car dumper, outflow routes and yard expansions.

“While we look to expand capacity at the port, we must ensure we have the iron ore ready to feed it.”

Demand from China was a big talking point in BHP’s latest annual update, with the group indicating medium-term demand for iron ore was likely to be lower than in August.

Commenting broadly on pricing, UWA’s Professor Trench said there was more give in the iron ore price than might be expected.

“I don’t think we’ve got the higher-cost production explosion that we had before the global financial crisis and in 2011-12,” he said.

“I remember when the iron ore price ticked down to [about] eighty bucks, October 2012. It scared everybody to death because there were a lot of high-cost producers in Australia, and now I think [companies have] generally got their costs down.”

In other local iron ore developments, there are signs of growth outside of WA’s hematite wheelhouse.

Fortescue this year also joined the small club of WA magnetite exporters after its first shipment of higher-grade ore to Vietnam in July 2023.

Located about 145 kilometres from Port Hedland, Iron Bridge is one of only a handful of producing magnetite mines in WA, alongside Karara Mining’s namesake operation and Citic Pacific’s Sino Iron.

The Iron Bridge project followed a difficult road to get there, which has ultimately slashed the value of the operation by $1 billion after a series of delays and cost blowouts.

Gina Rinehart’s Atlas Iron is also angling to join the magnetite game, with the Ridley Magnetite project currently being assessed by the Environmental Protection Authority.

Once producing, it’s expected Ridley will pump out an initial 3mt of magnetite for export under stage one before ramping up to 16.5mt under stage two.

Hurdles

The battle against red tape has featured heavily of late among resources players keen to minimise administrative burden.

Speaking in October at a Senate Committee concerning the proposed federal industrial relations reforms, Hancock Prospecting chief executive group operations Gerhard Veldsman indicated Ridley had been due to start in 2027 or 2028.

In the same hearing, he suggested that red tape associated with the proposed IR reforms could push the project back to 2032.

The proposed legislation, which is in the consultation stages, would require labour hire workers to receive the same pay and conditions as employees directly engaged by a business.

BHP chief executive Mike Henry has spoken regularly about his company’s concerns for the proposed reforms, claiming they could cost the global miner’s Australian operations as much as $1.3 billion per year.

In a separate matter, Woodside Energy recently had seismic surveying approved by the National Offshore Petroleum Safety and Environmental Management Authority overturned following a decision in the Federal Court.

Plaintiff and traditional owner Raelene Cooper argued she had not been adequately consulted under the conditions of the approval, and that NOPSEMA’s decision to approve the application with a consultation condition was not legally valid.

Fellow energy major Santos was subject to a similar finding relating to inadequate consultation in 2022, when the court overturned approvals for Santos’s Barossa gas project in the Timor Sea.

Resources Minister Madeleine King – who claimed in 2022 that companies needed to go above and beyond the letter of the law on consultation matters – said in light of the Woodside decision there needed be more clarity as to what ‘consultation’ actually entailed.

Independent energy consultant and former Kvaerner Australia vice-president Jeanette Roberts told Business News uncertainty surrounding such matters posed risk.

“Industry and NOPSEMA are working through what the impact is. But that uncertainty is very debilitating and concerning for industry, and makes it difficult to make concrete investment decisions, particularly for these very large projects,” Ms Roberts said.

“And as I also said, it undermines Australian sovereign risk, because we’ve traditionally been seen as a reliable investment destination.

“If there are issues where the ground rules change halfway through the project it’s very difficult for investors to make those decisions.”

Spurred by conflict in Ukraine and now in the Middle East, and with no certain view as to how long liquefied natural gas will be used in the sweeping energy transition, oil prices have stayed strong.

“With regard to the oil price, it’s traditionally a very volatile commodity,” Ms Roberts said.

“It goes up and down pretty regularly. The global oil and gas business, and you might argue, the global economy in general, responds accordingly.

“And of course, it’s very sensitive to global unrest. So, at the moment you would argue that a lot of volatility is associated with issues in Gaza, previously, the Ukrainian situation.”

While there are certainly efforts under way to find new and renewable energy sources, general consensus holds that LNG will have a big part to play in the foreseeable future.

“I think it’s really important to remember that LNG is a major contributor to the WA economy, and that LNG exports are very significant globally,” Ms Roberts said.

Woodside recently handed down a record half-year profit of $US1.7 billion ($2.7 billion), despite a 23 per cent reduction in realised prices for its product in the first half, down to $US74 per barrel of oil equivalent.