Minerals sparkle in the dollar daze

IMPROVING commodity prices gave WA resource industries a more rewarding 12 months in 2000, and there is the prospect that the recovery in its fortunes will continue in the first year of the new century.

Most of the minerals produced in this State benefited from improved returns, particularly caused by the declining Australian dollar.

It is always a source of wry amusement to people in these industries that TV news announcers reveal, in sombre mood, that the Australian dollar has weakened again – for an exporting State like WA this is good news.

The Australian dollar’s value is so crucial that many analysts regard this as more important to the profitability of local resource industries than movements in prices when quoted in U.S. dollars (in which most minerals are traded).

More than half the revenue generated by Australian resources industries comes from WA; they play a dominant role in making the State the nation’s export powerhouse (Less than 10 per cent of Australia’s population produces a quarter of its export income).

A report produced last week by PricewaterhouseCoopers and the Australian Mineral Council confirms that mining companies had a better year in 2000, with a modest improvement in profits and increasing sales.

However this report, while an excellent snapshot of the Australian industry, does not distinguish between regions.

As Nick Henry, a partner at PricewaterhouseCoopers who specialises in resources, points out, local industries did even better than the national picture would suggest.

This was because Australia’s biggest mining industry, coal, had a poor year – but plays only a marginal role in WA.

With its performance subtracted from the totals, industries like iron ore, nickel, gold and oil gas – all crucial in this State – would have been seen to have performed strongly.

Australia’s mining industries have recovered in robust fashion from the potentially damaging 1998 Asian crisis.

A number of major reports have forecast some improvement in commodity prices in the next 12 months which, if the Australian dollar does not recover significant ground, will further improve returns to local miners.

But export earnings are only one part of the equation – the billions of dollars which have been poured into new projects in WA in the past decade have made a vital contribution to WA’s growth.

In the past two years investment has fallen away sharply, creating hardship for many local engineering and fabricating firms.

Chief economist at the Chamber of Commerce and Industry, Nicky Cusworth, estimates new project construction declined by at least 70 per cent, leading to widespread retrenchments and the closure of some firms.

Another wave of investment is expected in the coming year but local engineering firms are cautious in their projections, after a number of delays in the past year.

Construction of the third phase of the North West Shelf’s LNG project, at a cost of $2.5 billion, is expected to begin within the next six months.

Preliminary work on the West Angelas iron ore mine has begun, although the estimated capital investment in this, $1 billion, could be greatly reduced. Continuing disputes between the owners clouds the issue.

Projects, in steel, nickel and other minerals are also promising, but Nicky Cusworth warns that these will come only just in time; if a recovery does not occur soon, WA may lose the ability to fill new contracts as key personnel leave the State, and companies close.

However she says that all the signs are promising, with higher commodity prices, particularly for the products from this State, continued strength in Asia (subject to anxiety over higher oil prices) and particularly bright prospects for oil and gas.

The annual review of the resource industries, Bedrock of the Economy, produced by the WA Chamber of Minerals and Energy, demonstrates the great flexibility of the resources industries.

To survive recent difficult year and even improve their performance, WA resource companies have increased their productivity by 150 per cent in the past five years, five times the rate of the rest of the non-rural economy.

The chamber notes that 37 per cent of the State’s economy is accounted for by resources, compared with 13 per cent for Australia as a whole.

Not all the trends favour the local mining sector though. The study points out that increasingly Australian companies are being acquired by global giants, with a relatively small number of companies dominating each commodity.

Examples are the acquisitions by Rio Tinto of Ashton Mining, and North Ltd (which controls the Robe project), and Billiton’s increased holding in the Worsley alumina refinery. In the Pilbara iron ore industry there are now only two producers, where there were once four.

Shell’s bid for Australia’s biggest producer of hydrocarbons, Woodside Petroleum, is another example of globalisation and Anglo American also seeks to have a major role in WA’s nickel industry.

Bedrock points out that international companies “have a global focus, with activity directed to large-scale projects with high returns.

“With decisions being made internationally and on objective criteria, there is less room for locally influenced decisions as to where to explore and invest.”

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