28/03/2012 - 10:56

Nation’s mining sector makes the grade

28/03/2012 - 10:56

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The mining and mining services industries contribute 20 per cent of GDP and that figure is likely to rise.

The mining and mining services industries contribute 20 per cent of GDP and that figure is likely to rise.

TREASURY and the Reserve Bank of Australia use different methodologies to produce radically different estimates of the size of mining and related sectors.

The Reserve Bank estimate is clearly too low, as it excludes mining output for the domestic market and mining service exports and investment. I have corrected the Reserve Bank estimates (see story, right) and they are then similar to the higher Treasury estimates.

Treasury estimates that the mining sector, including metals manufacturing, will account for 12.3 per cent of total Australian real output in 2011-12 and is similar in size to the decade to 2002-03. While iron ore and coal output rose strongly in the last decade, oil output declined.

The strongest growth has been in mining-related production, which covers manufacturing, construction and service firms that contribute to mining output and investment. 

Referred to here as mining services, this sector has doubled from 4 per cent of output in the decade to 2002-03 to an expected 8.4 per cent in 2011-12. Mining services output is growing rapidly at 15 to 20 per cent a year and Treasury estimates that on the back of the mining investment boom it will expand from 6.7 per cent of the economy in 2010-11 to 9.4 per cent in 2012-13. Yet some commentators continue to think of the mining sector as relatively small.

On budget forecasts, Treasury concludes that, over the three years to 2012-13 the mining sector will grow annually at 5 per cent and mining-related sectors at over 20 per cent on the back of the investment boom.

By contrast, the non-mining sectors comprise 75 per cent of the economy, but are growing annually at only 1 per cent. 

Mining companies demand high-quality competitive inputs. This has created many leading edge mining service firms that invest in research and development, enabling them to export and compete offshore.

The rapid growth in mining services reflects the surge in mining investment, increased contracting out to specialist providers by mining firms, and the growth of sizeable Australian mining service firms that are diversifying internationally by both exporting and producing offshore. Mining service industry growth has been customer-driven and public policy has not played an important role. 

The success of mining services reflects the demand of mining itself for competitive inputs if it is to compete in world markets. 

While the construction side of mining services will decline when mining investment peaks, mining output will rise and boost mining service firms involved in contract mining and maintenance. 

There are 122 firms listed on the ASX with combined mining services revenue of $86 billion in 2010-11 and with expected revenue growth of 17 per cent in 2011-12 (based on stockbroker forecasts). 

These firms are growing rapidly and 20 of the top 150 ASX firms by market capitalisation have substantial mining service revenue. On one estimate, they generate export revenue of around $9 billion.

Notable examples include construction, engineering and mining contractor Leighton Holdings, engineering specialist Worley Parsons, explosives manufacturer Orica, testing company Campbell Bros, drilling contractor Boart Longyear, mining contractor Downer EDI and manufacturer Bradken.

Perth-based examples include: contractor Mineral Resources (which is also a miner in its own right); engineering and construction contractors Monadelphous, Macmahon, Decmil and Forge; drilling contractors Ausdrill and Swick; engineering firms Clough and Lycopodium; drilling equipment supplier Imdex; and mining contractors NRW and Maca.

Because neither the Australian Bureau of Statistics nor the ASX identifies these firms as a ‘sector’, their importance and rapid growth is often overlooked. They represent a cluster of internationally competitive Australian firms in construction, engineering, drilling, manufacturing, logistics and services that produce often high technology products and high value added services.

In conventional treatments, the expanding mining sector is associated with a contraction in existing tradeable industries like manufacturing and agriculture, while the non-tradeable services sector also expands. 

Yet the rapid growth in mining services currently underway generates increased demand in several manufacturing sub-sectors. Explosives is recorded in chemicals; rail wagons in transport equipment; high technology mining equipment for drilling and excavation in machinery and equipment manufacturing; fabrication in metal manufacturing; and off-site homes in prefabricated building manufacturing. Just the listed firms in these industries have revenue of $15.5 billion, though not all is produced in Australia. 

So some manufacturers benefit from the mining boom, even if others are squeezed by the higher Australian dollar. Substantial parts of construction, transport and power are also mining-related and some firms do better than the sector average by tapping into the mining boom. 

Irrespective of the ownership of mining companies, nearly two thirds of mining revenue is spent on labour, goods and service inputs, tax and royalties, while mining profits are being used at present to finance additional investment. We need the right environment so firms can adapt to the new opportunities and pressures that rapid Asian growth creates. Policy must focus on maximising the benefits of the boom, which are much wider than just minerals exports. 

That requires adjustment to demand and supply side policies. 

The floating of the dollar in the 1980s forced supply side changes in product and labour markets that improved the way the economy operated. 

Current rapid mining growth is also forcing supply side changes and means more reforms are needed both to maximise the benefits of the boom and minimise the pain for other sectors. Such reforms would be easier to sell in a high growth economy.

This is an edited extract from Maximising Growth in a Mining Boom, a research paper commissioned by the Minerals Council of Australia and written by independent economist Ed Shann.


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