Changing the mining mix

The shift towards a low-carbon economy is changing the mix of mining commodities, away from thermal coal and other hydrocarbons into materials required for renewable technologies.

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Stricter emission regulations, lower battery costs, more widely available charging infrastructure and increasing consumer acceptance is generating momentum for electrified vehicles (hybrid, plug-in, battery electric and fuel cell).

“Australia has seen some momentous shifts in the mining industry over the past 15 years.”

With continuous improvement over the next two decades in the cost and performance of batteries and charging technologies, full electric vehicles are expected to eventually command a significant percentage of new car sales. This is driving the demand to manufacture batteries for electric vehicles and solar panels to support charging capacity. And it provides a potential opportunity to mine more ‘battery commodities’.

Western Australia has large deposits of the battery-related minerals lithium, cobalt, nickel, alumina, manganese and vanadium. Demand for these commodities is forecast to increase almost sevenfold between 2020 and 2030, according to Bloomberg BNEF.

Although demand prospects look robust in the long-run as auto industry embraces electric vehicle, supply overhang and slack demand this year weighed on prices. The market currently has supply overhang for battery materials and lithium and cobalt prices have been falling since 2018.

The deterioration in the global economic outlook and policy factors, such as cuts to Chinese subsidies for the electric car market, are having a dampening effect on demand. This has seen some Australian projects moved to the backburner, while ASX-listed lithium miner, Alita Resources, has entered voluntary administration.

Tianqi and Albemarle cited slower-than-expected demand growth as a key factor in their decision to put the planned expansion of Greenbushes – already the world’s largest producing lithium mine – on hold. Tianqi has also paused construction of the second stage of its lithium hydroxide processing plant in Kwinana. However, over the longer term, industry players appear confident that demand will return.

Along with battery commodities, hydrogen is a clean-burning fuel under close consideration since it produces only water when consumed in a fuel cell. It can be produced from a variety of domestic resources such as natural gas, nuclear power, biomass and renewable power like solar and wind. It can also be used in a range of industries, including transport and electricity generation, and can be stored and exported.

Hydrogen technologies also offer a way of reducing emissions from steel making’s use of coal. This could see the steel industry shed its reputation as a climate threat. Western Australia has the potential to further develop an industry for renewable hydrogen, given its land and renewable energy resources.

Investment increase

Australia has seen some momentous shifts in the mining industry over the past 15 years.

Investment boomed in the late 2000s and early 2010s on the back of the huge number and size of oil and gas, iron ore, coal and other mineral projects. As the investment phase wound down and the operations phase ramped up, exports began their boom.

Australian exports have consistently been setting new records, driven by both volumes and prices for mining commodities, as well as tourism and education exports. Consequently, Australia recorded its first current account surplus since 1975 in Q2 2019.

Mining investment has fallen more than two-thirds from its peak in 2012-13, detracting from economic growth, but the outlook appears to be turning.

However, the deterioration in the global backdrop from late-2018 into 2019 – particularly the US-China trade dispute – has put a cloud over the outlook for commodity prices and creates some uncertainty around the investment pipeline.

Future outlook

In June 2019, mining capital expenditure recorded its strongest quarterly result in five years, rising 1.7 per cent quarter-on-quarter.

After six years of contraction, mining firms are currently planning a 20 per cent increase in capital expenditure (capex) in 2019-20, although the current trade conflict and slowing global economic growth puts a cloud over this outlook.

The $A4.6 billion South Flank iron ore development is under construction in the Pilbara and a number of other multi-billion-dollar iron ore projects are expected to get underway in 2019-20, including the Iron Bridge and Koodaideri projects in Western Australia.

The Carmichael coal mine in Queensland could begin major construction works in the near-term, although question marks remain over its viability. Further ahead, realisation of the potential investment pipeline appears very unlikely, given the low probability of other mega coal projects in the Galilee Basin going ahead.

Either way, the peak in this round of mining projects will be nowhere near that of the previous cycle.

ANZ Research’s Australian Major Projects report looks at current and future spending on major projects in the infrastructure, resources, non-residential building industries and more. Keep an eye out for future articles detailing these trends on bluenotes.

Daniel Hynes is Senior Commodities Strategist and Catherine Birch & Jasmine Kaur are Senior Economists at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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