The Federal Government has released its second stimulus package, which will see a total of $189 billion injected into the economy to keep businesses in business.
This funding figure includes $66.1 billion of new funding from the latest economic support package.
The package will include assistance for businesses to keep people in a job, regulatory protection and financial support for businesses to stay in business, and support for households including casuals, sole-traders, retirees and people on income support.
Up to $100,000 is available for eligible small and medium sized businesses that employ people, with a minimum payment of $20,000, to help them keep operating, pay the rent and bills, and retain staff.
Under the enhanced scheme from the first package, employers will receive a payment equal to 100 per cent of their salary and wages withheld, up from 50 per cent, with the maximum payment increased from $25,000 to $50,000. Additionally, the minimum payment has been increased from $2000 to $10,000. It will be available from 28 April 2020.
The Federal Government aims to incentivise businesses to hold on to more of their workers by linking the payments to staff wage tax withholdings. The payments are tax free and will flow automatically through the Australian Taxation Office.
It expects to benefit around 690,000 businesses employing around 7.8 million people.
Small and medium business entities with aggregated annual turnover under $50 million and that employ workers are eligible.
An additional payment is also expected to be made from 28 July 2020. Eligible entities will receive an additional payment equal to the total of all of the Boosting Cash Flow for Employers payments received.
This measure is estimated to cost $31.9 billion over the forward estimates period, including the value of the measure around the first package.
In addition, the Federal Government will establish the Coronavirus SME Guarantee Scheme, which will support small and medium enterprises (SME) to access the working capital needed to get through the impact of the coronavirus.
Under the scheme, the Federal Government will guarantee 50 per cent of new loans issued by eligible lenders to SMEs. It aims to do so by enhancing lenders’ willingness and ability to provide credit to SMES, with the scheme able to provide up to $40 billion of lending to SMEs.
It aims to complement the reduction in red tape to help SMEs get access to credit faster and the announcement made by Australian banks to support small businesses with existing loans.
Prime Minister Scott Morrison said the Federal Government was acting to cushion the blow from the coronavirus for businesses and households to help them get through to the other side of the crisis.
“We want to help businesses keep going as best they can and for as long as they can, or to pause instead of winding up their business. We want to ensure that when this crisis has passed Australian businesses can bounce back,” Morrison said.
“Our focus is on cushioning the blow and providing hope to every Australian that we will get through this and come out the other side together.
“We know this will be temporary. That’s why all our actions are geared towards building a bridge, keeping more people in work, enhancing the safety net for those that aren’t and keeping businesses alive so they can get to the other side and stand up their workforce as quickly as possible.”
Treasurer Josh Frydenberg said the $189 billion economic support package was the equivalent of 9.7 per cent of GDP.
“The Government is taking unprecedented action to strengthen the safety net available to Australians that are stood down or lose their jobs and increasing support for small businesses that do it tough over the next six months,” Frydenberg said.
“These measures build significantly on what we have already announced.
“These extraordinary times demand extraordinary measures.”
Today we live in constantly evolving and technology-driven world. For mining operations specifically, adoption of digitalization is crucial for industry impact and success. Often overlooked by mining organizations because of its focus on smart products and engineering-driven manufacturing, Industry 4.0’s principles have much to offer the mining sector regarding:
Interoperability
Information transparency
Decentralized decision making
Technical augmentation
Among asset-intensive companies, better operational performance is the top reason for investments. The mining industry is no different mining companies must turn to Industry 4.0 and asset performance management implementation to improve safety, financial performance, and increase overall agility.
Read the E-book to learn how you can enhance your operations by capturing the Industry 4.0 payoff.
Aluminium is displacing classic steel, the shortage of skilled workers is to be compensated for by progressive automation, and environmental protection is increasingly becoming a priority – this is only a small part of the topics that will dominate the foundry industry this year and in the years to come. We present you with five trends that you should keep an eye on this year.
1: Aluminium instead of steel
Ever more products are produced with the material aluminium. There are numerous reasons for this: The automotive industry is just as pleased as the avionics sector when it comes to lighter components. However, the stability of aluminium is also a major factor. In mechanical engineering, this material is also used for mechanically demanding tasks.
In 2017, approximately six per cent more aluminium was produced than in the previous year. The higher price of the material becomes an ever smaller argument against this metal: The price of the finished product decreases due to advanced manufacturing methods and state-of-the-art machinery. Raw material prices have been comparatively high for years, but they are not affected by as many fluctuations as metal.
Fewer and fewer people are working in the foundry industry. Harsh working conditions and falling training figures suggest further declines. In order to remain competitive, companies rely on semi-automated or completely autonomous systems to maintain or even increase their production.
By no means does this lead to further job cuts. Quite the opposite: Employees are able to invest more time in designing or testing instead of pressing buttons on machines, transporting raw materials or filling molten metal at high risk. At the same time, this increases the interest of younger generations to get involved in the design or the development of the foundry industry.
3: Digitisation and Industry 4.0
Sensors, linked machines and smart controls have no fear for the foundry either: Numerous production sites are already centrally connected. Not only foundries, but also customers and potential clients benefit from the data. Processes can be optimised with big data and possible bottlenecks and errors in the system can be detected at an early stage. Manual adjustments in the operating procedure are less necessary.
New technologies like virtual reality help companies to present themselves to the outside world. Thus, a virtual tour of the production halls becomes possible for everyone. Safety concerns are no longer necessary – furthermore, a presentation of the company is possible everywhere. Thanks to augmented reality, technicians can easily adjust or repair machines with a superimposed virtual image. Also virtual learning becomes easier with the new technologies. Meanwhile, numerous CAD programmes can also be used by way of 3D glasses to make prototyping more efficient.
Foundries are considered to be amongst the most energy-hungry industries in Germany. The plants, which are often fed by coal, use around 16 per cent of the total electricity produced in Germany and 12 per cent throughout Europe. A study by the Federal Environment Agency proves that the majority of foundries could get their energy requirements from renewable energies. For this, however, energy storage devices are necessary that can meet the enormous requirements for continuous day-night operation.
Through the use of more efficient casting moulds, fewer raw materials are required, which also do not need to be transported. The energy requirement can be further reduced by using more efficient furnaces in order to make the entire production process more environmentally friendly.
Particularly for smaller cast products, things could change soon: More and more 3D printers are managing to deal with metals. Selective laser sintering (SLS) applies metal layer by layer in order to produce small components cost-effectively, quickly and more accurately than with conventional processes. Depending on the individual application, additive manufacturing offers various sizes ranging from half a cubic metre to entire warehouses that can be converted.
The innovative technology is already being used in projects that require only a small quantity of the final product. Structures, which would not be possible in normal casting, pose no problem for additive manufacturing either. For large quantities and parts with larger dimensions, not much will change for the time being.
Australian Mining looks over the latest mineral resources strategy from the Victorian Government, which aims for a spend of $220 million over the next five years.
On August 28 2018, the Victorian Government released its mineral resources strategy for 2018–2023, identifying key challenges and opportunities in the state’s mining sector.
The government report, entitled State of Discovery: Mineral Resources Strategy 2018–2023, lays out five key action areas that explore different segments of Victoria’s minerals sector. The Victorian Government is aiming to spend $220 million in exploration investment by June 2023 to help meet these goals.
While not the largest Australian mining state, Victoria is home to several large mining companies, including BHP, Newcrest and OceanaGold, with Melbourne-based firms accounting for 65 per cent of mining stock from the ASX100 in 2018 ($188 billion in all).
Meanwhile, major mines such as Fosterville (Victoria’s largest gold mine), owned by Canadian-Australian miner Kirkland Lake, have posted record results recently, with production at said mine up 21 per cent to June 2018.
In addition, mineral spend is increasing significantly in Victoria, up 79 per cent year on year (YoY) in March 2018 compared with 27 per cent nationally according to figures from the Australian Bureau of Statistics.
The minerals industry in Victoria also employs around 121,000 people and made a total direct and indirect contribution of $13.6 billion in 2015–16 for the state coffers (around four per cent of gross state product).
State of Discovery: Mineral Resources Strategy 2018–2023 is championing ambitious growth for Victoria’s minerals sector. Megan Davison executive director of the Minerals Council of Australia (MCA), posted a warm response to the report, stating that, “Victoria is blessed with a diverse commodity base including operating gold, antimony and brown coal mines, world-class mineral sands deposits and highly prospective precious and base metals provinces.”
The Victorian Government cites Victoria’s “intensively developed” landscape as a potential challenge for exploration expansion in the report, and as such has emphasised responsible minerals exploration as a key point of its strategic overview.
To advance geoscience and encourage mineral exploration and development to Victoria, the Government plans to release a Victorian resource prospectus that integrates resource and freight transport planning. It also plans to conduct competitive tenders to attract “high-performing” explorers.
The meat of the report lies in its five key action areas, however; key points to be addressed over the next five years.
The five action areas include (in order) Confident Communities and Responsible Explorers; Advancing Geoscience and Encouraging Mineral Exploration and Development; Victoria as a Global Mining Hub; Improve Regulatory Practice and Industry Compliance; and Deliver Modern, Fit-For-Purpose Laws.
The report’s introductory strategic overview states that “gaining and maintaining community confidence in the social, environmental, and economic performance of mineral exploration and development [is] critical for the sector” and the first of the five key action points builds on this.
Confident Communities and Responsible Explorers relates to improving community acceptance of the mineral resources industry through better understanding of the attitudes of Victoria’s community towards the sector and improved support of landholders in their negotiations with the industry.
The State Government hopes to build this trust by improving transparency and social responsibility standards for explorers, while also securing enduring benefits for host communities.
In addition, the Victorian Government hopes to provide more information to local communities about mining’s value and build a socially and environmentally responsible mining environment.
The second key action area, Advancing Geoscience and Encouraging Mineral Exploration and Development, refers primarily to the Victorian Government’s plan to create a Victorian resources prospectus to increase interest in mineral investment to Victoria. The Victorian Government will also attempt to make use of freight transport for mineral operation expansion and support skills development for mining (and mining services) through apprenticeships and TAFE courses.
The third action area, Victoria as a Global Mining Hub, is to focus on Victoria’s expansion as a mining exports provider. It cites factors such as the continuing growth of Victoria’s mining exports as a percentage of total exports, increase in mining companies, and hosting of events such as the annual International Mining and Resources Conference (IMARC) in Melbourne as evidence of this.
The fourth and penultimate action point, Improve Regulatory Practice and Industry Compliance, will see the creation of a robust regulatory system that builds on the Victorian Government’s current Earth Resources Regulation (ERR), part of the Department of Economic Development, Jobs, Transport and Resources.
ERR has seen backlog reductions in the last year for work plan and licence applications since the commencement of reforms last year, and the 2018-19 Victorian Budget will include $12.7 million of funding to support the implementation of further regulatory streamlining procedures, including an upgraded online system for mining applications.
The overall aim of this section will be to “simplify processes, sharpen risk focus, provide clear and timely information” as well as to “improve coordination between regulators”, “build regulator capability to support industry compliance,” and “measure, evaluate and report on regulatory and industry performance”.
The final key action point is Deliver Modern, Fit-For-Purpose Laws, which will allow for increased options for “responsible and safe” mining and mineral exploration. In August, the Victorian Government introduced the Mineral Resources (Sustainable Development) Amendment Bill 2018, which declared that a new Mine Land Rehabilitation Authority (MLRA) be implemented to succeed the current Latrobe Valley Mine Rehabilitation Commissioner (LRMVC).
Mines are to develop post-closure rehabilitation plans, with said plans a legal obligation of the landowner, with MLRA able to take on this role and responsibility in exchange for payment from the mine owner.
The action point states that the Victorian Government will develop on this bill by increasing transparency for investors and the community, amending the Mineral Resources (Sustainable Development) Act (MRSDA) to allow for the publication of non-commercial-in-confidence mining licences and work plans.
Information disclosure requirements will be revised, as will requirements for the timeliness of the release of mineral exploration data. Commercial-in-confidence data will be” appropriately protected where there is a genuine need for non-disclosure,” the report states.
Overall, the Victorian Government has delivered an ambitious report that suggests a confidence in mining’s returning optimism. As Davison says, “State of Discovery provides an opportunity to grow the state’s minerals industry through greater investment attractiveness, more engaged communities and modern regulatory regimes.”
This article originally appeared in the October issue of Australian Mining.
With the construction phase of Australia’s mining boom largely complete, this article investigates the outlook for mining investment over the next decade or so. Using two complementary approaches, our analysis suggests that mining investment will likely make up a larger share of GDP than it did before the boom.
Introduction
Resource companies have undertaken large-scale capital expenditure (capex) to increase the productive capacity of the Australian resources sector over the past decade, incentivised by an increase in global demand for coal, iron ore and liquefied natural gas (LNG), and an expectation that commodity prices would remain elevated for some time. This period of ‘expansionary capex’ saw total mining investment increase from an average of around 2 per cent of GDP in the decade or so before the boom to a peak of about 9 per cent in 2012/13 (Graph 1). The surge in investment saw the Australian mining sector roughly double its share of the economy’s capital stock and increase its share of total output.
Graph 1
With the wind-down of the mining investment boom largely complete, mining investment over the next few years is expected to be driven by firms seeking to maintain their existing level of productive capacity (‘sustaining capex’). Given the increase in the capital stock over the past decade, the level of sustaining capex is likely to be considerably higher than before the boom to ensure the new, higher level of production is maintained over time. At the same time, further large-scale expansions of coal, iron ore and LNG seem unlikely for at least the next few years, given the recent increases in productive capacity globally. In addition, growth in demand for iron ore and coal is expected to slow over time.[1] Nonetheless, as in the past, mining investment is likely to continue to fluctuate in any given year as expenditure in the sector is often lumpy.
This article investigates the outlook for mining investment in Australia over the next decade or so using two complementary approaches. First, we use a standard production function framework to estimate where the ratio of mining investment to GDP may settle over time based on long-run determinants of mining investment. We then take a bottom-up approach and consider the sustaining capex component of mining investment in more detail, focusing on the outlook for Australia’s three major commodity exports – coal, iron ore and LNG – over the next 5 years.
Long-run Determinants of Mining Investment
A production function defines how much output is produced from available inputs – in this case labour and capital. For firms in the mining sector, the accumulation of capital is particularly important because of the capital intensive nature of production. Since firms accumulate capital through investment, a production function provides a useful starting point to investigate the long-run determinants of mining investment. We use a Cobb-Douglas production function, which is commonly used in the economic growth literature:
Where Y is mining output, K is capital, L is labour, A is multifactor productivity and α is the capital share of income.
This production-based framework implies that, in the long run, mining investment will be determined by: (i) the capital share of income; (ii) the rate of return on capital; (iii) the growth rate of mining output; and (iv) the depreciation rate. Long-run estimates of these variables allow us to determine the long-run values of some key economic ratios, such as the ratio of capital-to-output and investment-to-output. These ratios, along with the mining sector’s share of total output, allow us to consider where mining investment’s share of GDP is likely to settle in the long run.
The key result of our analysis is that, based on a set of simple assumptions, mining investment’s share of GDP is likely to be between 2½ and 4 per cent in the long run. This is higher than the 2 per cent average recorded over the decades preceding the mining boom; mining investment has risen to above 2½ per cent of GDP on only a handful of occasions over this period (Graph 2). We discuss our estimation of the long-run determinants of mining investment below.
Graph 2
Estimating the capital-to-output ratio
The capital-to-output ratio is a measure of the amount of capital that is used to produce a single unit of output. In the mining sector, capital includes machinery and equipment, as well as associated infrastructure (for example, railways, gas pipelines and ore processing facilities).
The Cobb-Douglas production function we have chosen to use implies that the long-run capital-to-output ratio (K/Y) depends on the capital share of income (α) and the return on capital (r):
The capital share of income (α) reflects the percentage of income generated in the mining sector that accrues to the firms’ owners, as opposed to the share paid as wages to employees. The capital share of income in the Australian mining sector tends to fluctuate between 70 and 80 per cent (we assume a capital share of income of 76 per cent), and is much higher than the capital share of income in other goods-producing industries. The capital share in the mining sector may increase a little further over the next few years, as LNG is expected to account for a larger proportion of total mining production and LNG production is relatively more capital intensive than other commodities.
The rate of return on capital (r) is the income accruing to a firm for each dollar invested in the capital stock. Liaison and survey evidence suggests that firms across a range of sectors use a required rate of return (or ‘hurdle rate’) of around 15 per cent when assessing the viability of investment projects (Lane and Rosewall 2015); we use this rate in our calculations. Firms’ hurdle rates are reported to be relatively constant over time and insensitive to changes in the cost of capital (for example, interest rates charged on debt). However, these rates vary substantially across firms, with Lane and Rosewall reporting a range of between 10 and 30 per cent. Variation in the realised return on capital should partly reflect differences in the productivity of firms’ machinery and equipment. For example, a firm with more productive drilling equipment will require fewer capital inputs to produce a given amount of output. For this reason, a higher return on capital is associated with a lower long-run capital-to-output ratio.
The capital-to-output ratio is currently well above our estimate of its long-run value of 5.1, although the gap has closed somewhat recently as production from the new additions to capacity has increased (Graph 3). Further declines are likely to occur over the next few years as production from the remaining LNG construction projects ramps up and few new major additions are made to the capital stock.
Graph 3
Estimating the investment-to-output ratio
The investment-to-output ratio is defined as the value of investment required to support a given level of production. Our approach implies that the long-run value of this ratio is determined by: (i) the long-run capital-to-output ratio (K/Y); (ii) the long-run growth rate of mining output (ΔY*); and (iii) the depreciation rate (δ). This ensures that there is sufficient investment to expand the capital stock to support growth in production, as well as to replace worn-out machinery and equipment.
There is a close relationship between mining production and investment. To increase output, firms must first invest in expanding mining capital. We have assumed that the capital required to produce one dollar of output is constant in the long run, implying that changes in production and capital match each other. Therefore, the faster firms wish to expand output, the more investment will be required to increase the stock of available capital.
Theory suggests that the long-run growth rate of output is driven by changes in productivity and the supply of labour. In practice, this calculation is complicated by difficulties with the measurement of productivity for the mining sector (Topp et al 2008). To avoid this complication, and to ensure that mining output settles at a stable share of total production, we assume that both nominal mining output and nominal GDP grow at 5 per cent in the long-run.
The depreciation rate, which measures the amount of firms’ capital that is ‘consumed’ or worn out in a given period, is also an important driver of the long-run investment-to-output ratio. Within our framework, this means that some investment is required simply to offset depreciation and maintain the value of the existing stock of capital. It follows that a higher depreciation rate will require firms to invest more to maintain their existing capital. This is similar to the concept of ‘sustaining capex’ that we discuss in the next section.
The Australian Bureau of Statistics (ABS) measure of the mining sector depreciation rate has fallen substantially over the past decade. This is likely explained by a compositional shift of the mining capital stock towards longer-lived assets, as well as a decline in the average age of the mining capital stock over this period (Graph 4).[2] As this capital ages, we might expect the depreciation rate to rise from its current level, increasing the amount of investment required to maintain the sector’s existing productive capacity. For simplicity, we assume that the depreciation rate is unchanged from its current level of 5.6 per cent.
Graph 4
Bringing these variables together gives a long-run estimate of the mining investment-to-output ratio of 0.54, which is a bit above its current level (Graph 5). The investment-to-output ratio may remain below its long-run value in the near term as mining output continues to increase (led by the completion of LNG projects) and investment in capacity expanding projects remains subdued.
Graph 5
Mining investment as a share of GDP
We are interested in calculating the long-run value of mining investment as a share of total output, or GDP. So far we have estimated the long-run values for mining capital and investment as a share of mining output. To calculate the mining investment share of GDP, we need to estimate a long-run value for the mining sector’s share of total output (Y/GDP). This will ensure that our results are consistent with the mining sector’s relative importance in the economy.
There is uncertainty around where the mining sector’s share of total output will settle in the long run. It is unlikely to decline to its pre-boom level (around 4½ per cent), although this provides a useful lower bound for our estimates (see Graph 1). The share that prevailed at the peak of the terms of trade is likely to be too high – even as an upper bound – given expectations of further declines in commodity prices, related to a moderation in demand and further increases in global supply. Instead, we consider an upper bound that is close to the mining sector’s current share of output (7½ per cent). This range balances the possibility of further declines in commodity prices with expectations of continued growth in mining output as the final LNG projects are completed. This range of estimates for the mining sector’s share of total output implies a long-run mining investment share of GDP of between 2½ and 4 per cent. Appendix A tests the sensitivity of this result.
The Outlook for Sustaining Capex
In this section we explore the outlook for sustaining capex – investment required to maintain firms’ existing productive capacity – across Australia’s three major commodities (coal, iron ore and LNG).[3] The analysis uses information from company reports, the Bank’s liaison program and other data providers, allowing for a more detailed investigation of sustaining capex than is offered in the production function framework. The focus on sustaining capex is relevant as this type of expenditure is expected to make up the bulk of mining investment for the major commodities over the next few years. Only a small number of new expansionary projects are expected to be undertaken in the near term given few projects have been announced in recent years and exploration activity is at a low level.
Separate estimates of sustaining capex are made for each commodity to account for differences in the scale, nature and timing of investment across industries. In doing so, capex is separated into that related to ‘resource replacement’ and that for ‘asset-sustaining’ capex.
Resource-replacement capex includes expenditure on new replacement mines or gas wells and associated infrastructure to maintain a given level of output.[4] Such expenditure is significant in resource industries because of the finite nature of natural resource deposits. It is typically less than capex for expansionary projects, because existing infrastructure and equipment from the depleted deposit is redeployed to the new mining area or gas field where possible. For example, haul trucks and ore processing facilities from depleted mines can be relocated to replacement sites in the iron ore or coal sectors, while replacement gas wells can be designed to connect to existing offshore pipelines and onshore LNG plants. Resource-replacement capex tends to occur infrequently; the timing and size of expenditure depends on the size of existing resource deposits, production (depletion) rates and market conditions.
Asset-sustaining capex includes spending to repair, maintain or replace assets used for extraction and production (e.g. trucks, trains and LNG plants).[5] Unlike resource-replacement capex, asset-sustaining capex is more likely to be undertaken on an ongoing basis and is less dependent on changes in market conditions. However, a number of factors still influence the level and timing of asset-sustaining capex. A larger capital stock and higher equipment utilisation rates will increase the required amount of capex, consistent with spending to offset depreciation described in the production function approach. Asset-sustaining capex also tends to be higher in the middle years of an asset’s life-span, because little spending should be required in the early years and firms generally try to minimise expenditure as an asset nears the end of its effective life. Technological and process improvements have reduced maintenance spending in recent years, which is expected to have resulted in a somewhat lower level of asset-sustaining capex than would otherwise have been the case.[6] There is generally limited ability to defer asset-sustaining capex.
Sustaining capex for Australia’s three major resource commodities is expected to increase noticeably over the next five years, making a modest contribution to nominal GDP growth over that period (around 0.2 percentage points per annum; Graph 6). It is estimated that around $100 billion will be spent on sustaining capex for these commodities over the next five years. Even so, the amount in dollar terms is quite small compared to the boom. Total mining investment will be higher than estimates of sustaining capex due to investment in Australia’s other resource commodities and any expansionary capex for coal, iron ore and LNG.
Graph 6
Around half of the estimated sustaining capex reflects spending by the LNG sector, as replacement gas fields are being considered at the two oldest Australian offshore LNG operations. These resource-replacement projects account for almost half of estimated LNG sustaining capex over the next five years because offshore LNG projects tend to involve the infrequent development of very large offshore gas fields with long production lives. Onshore coal seam gas (CSG) LNG projects, on the other hand, require the ongoing development of gas wells to maintain production volumes. Accordingly, resource-replacement capex for these projects is generally smaller and less volatile than for offshore projects.
In contrast, asset-sustaining capex by the LNG industry is expected to be relatively small and fairly stable on an annual basis for the next five years or so, partly reflecting that much of the existing capital stock was only purchased or built in the past few years.
Sustaining capex in the coal and iron ore sectors is expected to increase from a low level in coming years as assets age and replacement mine activity rises, particularly from around 2020. Estimates for the coal sector are somewhat more uncertain relative to other sectors, given the large number of mines in the coal sector and that extraction methods are relatively more heterogeneous than in other sectors.[7]
Resource-replacement capex by iron ore and coal producers is expected to be around $10 billion between 2018 and 2022. This largely reflects plans by major iron ore miners to build large replacement mines, with spending on front-end planning and engineering work for a number of these mines beginning in 2017. The majority of sustaining capex in the coal and iron ore sectors over the next few years is likely to be on asset-sustaining capex. Asset-sustaining capex in both the iron ore and coal sectors picked up in 2017, partly reflecting a catch-up in spending as revenues improved alongside higher prices for both commodities. This follows reportedly low levels of expenditure in 2015 and 2016, both as equipment purchased for expansionary investment during the mining boom was still relatively new and firms sought to reduce costs in light of lower coal and iron ore prices. This catch-up in spending is expected to provide a modest boost to mining sector capex over the next year or so. Asset-sustaining capex across the two commodities is expected to be similar in magnitude and increase gradually over coming years as assets reach a more mature stage of their life-cycle.
Conclusion
The mining sector’s share of the capital stock has doubled since the early 2000s, driven by large-scale investment geared towards expanding the sector’s productive capacity. Based on a set of simple assumptions, mining investment’s share of GDP is likely to converge to between 2½ and 4 per cent in the long run, which is above the share that prevailed prior to the boom. Mining investment is expected to be relatively subdued over the next few years, because firms have limited appetite for further expansion. Instead, sustaining capex is likely to take on more importance as firms look to maintain their newly expanded productive capacity. Analysis based on company reports, the Bank’s liaison program and information from other data providers suggests that sustaining capex for Australia’s three major resource commodities will make a modest contribution to nominal GDP growth over the next five years, contributing around 0.2 percentage points per annum on average.
Appendix A: Sensitivity Analysis
The estimate for the long-run mining investment share of GDP is sensitive to the values chosen for the key variables: the capital share of income, rate of return on capital, potential output growth and the depreciation rate. Given the substantial uncertainty around the values for each of these variables, we test the sensitivity of our results to plausible variations in their long-run values. Specifically, we check to see how the mining investment share of GDP changes under the following four scenarios, where all other variables are held constant:
The capital share of mining income (assumed to be 76 per cent) increases to 90 per cent, based on LNG (which is more capital intensive than both iron ore and coal) making up a larger share of mining output than it has in the past.
The rate of return on capital (assumed to be 15 per cent) falls to 10 per cent or increases to 30 per cent.
The long-run growth rate of output (assumed to be 5 per cent) decreases to 4 per cent or increases to 6 per cent per annum.
The depreciation rate (assumed to be 5.6 per cent) increases by 2 percentage points to 7.6 per cent.
A higher capital share and depreciation rate both lead to modest increases in our estimate of the long-run mining investment share of GDP, and changes to output growth only have a marginal impact on our results (Graph 7). However, variations in the return on capital have a substantial impact on our estimates of the long-run mining investment share. On balance, these scenarios provide some comfort around our initial conclusion that mining investment is unlikely to return to its peak, but should remain above its pre-boom level.
Graph 7
Footnotes
The authors are from Economic Analysis Department, and would like to thank Emily Poole, Daniel Rees, Jarkko Jääskelä and Michelle van der Merwe for their helpful comments and feedback. [*]
See Roberts, Saunders, Spence and Cassidy (2016) for a discussion of China’s evolving demand for commodities. [1]
Generally speaking, the assumptions made by the ABS imply that the rate of depreciation on assets increases as the asset ages. [2]
These three sectors have accounted for the vast majority of total mining investment over the past 10 years, and averaged around 65 per cent of total resource exports. [3]
Associated infrastructure could include new gas pipelines and compression platforms for LNG projects and new conveyers, ore processing facilities, power and water infrastructure, and rail and road extensions for coal and iron ore projects. [4]
The classification of expenditure as capex rather than operating expenditure is determined largely by accounting standards. In general, expenditure on an asset that is expected to have an ‘enduring benefit’ (e.g. last a year or more) is classified as capex. [5]
Further technological and process improvements pose a structural downside risk to the future level of mining investment, particularly for sustaining investment. [6]
For example, coal can be extracted using a range of techniques applicable to open-cut or underground mines. In general, information from liaison suggests that asset-sustaining capex tends to be somewhat higher for underground mines. [7]
Roberts I, T Saunders, G Spence and N Cassidy (2016), ‘China’s Evolving Demand for Commodities’, in I Day and J Simon (eds), Structural Change in China: Implications for Australia and the World, Proceedings of a Conference, Reserve Bank of Australia, Sydney, pp 107–158.
Topp V, L Soames, D Parham and H Bloch (2008), ‘Productivity in the Mining Industry: Measurement and Interpretation’, Productivity Commission Staff Working Paper, December.
A report from global advisory organisation BDO Australia has predicted a number of future trends in the mining industry, including the prediction that 50 per cent of miners will be replaced by robots by 2020.
Handily though, the report also claims that around half of the jobs to be replaced will result in retraining of employees for remote technology control, spurring a demand in upskilling and hopefully avoiding any Skynet-style pitfalls in the process.
An additional plus side of this robotisation is that it should also cut workplace accidents by 75 per cent. However, the report, which can be read in full here, does warn of the potential ramifications of mining’s increasing connectivity; it suggests that by 2020, there will have been at least five global PDoS (permanent denial of service) cyberattacks at mine sites initiated through connected devices.
“The value of harnessing technology is clear,” said Sherif Andrawes, national leader, national resources at BDO.
“Driverless technology increases mining output by 15 to 20 percent while cutting fuel and maintenance costs by 10 to 15 percent and 8 percent, respectively [and] it also improves mining safety exponentially.
“At the same time, though, these Internet-connected technologies open the mining industry up to new cyberattack vectors that they must hedge against through proper internal controls. If not, they risk seeing their entire operation crippled by a single attack.”
In addition to trends of automation and connectivity, the report also predicts that renewables will account for a quarter of global electricity generation — a big change from the 14.1 per cent figure cited by a BP report in 2016 — and that deep-sea mining will begin to take off commercially, citing the work done by Nautilus in Papua New Guinea.
This is in part due to a cutdown in coal use, which currently accounts for around half of global electricity production. China, the world’s largest coal energy market, recently introduced new environmental protection legislation to combat its famously high air pollution.
ROBOTS
By 2020, robots will replace more than 50 percent of miners, and mining accidents will be cut by 75 percent. Half of the miners will themselves be retrained to run the technology controlling the robots.
Robots will be at the forefront of most mineral extraction by 2020, reducing safety risks for miners, maximising output, and streamlining costs. By 2020, we predict robots will replace most miners. Most in the workforce will be retained, but advances in technology and remote mining equipment will transform what that workforce looks like.
The global mining industry is already well-acquainted with autonomous technology. Self-driving trucks and autonomous drillers and muckers are employed onsite at almost every large multinational company’s mines. “Snake robots”—named for their agility—are equipped with Internet-connected sensors and used to navigate narrow mine shafts and collect data. Drones are also beginning to play a role in mapping the topography of a mine and capturing aerial images of inaccessible areas of the mine to identify possible vulnerabilities
and areas of tension. Remote vein miners (RVMs) are being developed to eliminate the need to drill and
blast to excavate rock—potentially reducing rock stress that can lead to seismic events.
The rise of the robot is not a death knell for the mining workforce but will inevitably lead to a demand for
reskilling. Traditional operational positions—drilling, blasting, and driving—will be downsized, but replaced by demand for remote operators and maintenance personnel to create the new version of the miner. Emerging digital mining jobs—engineers, software developers, and data processing and data analytics specialists—are more likely to attract the technologically savvy millennial workforce. By 2020, mining automation and data analytics will be key components of the curriculum for mining engineers.
Digitisation also promises to reduce safety risks for miners. Not only will robots assume the most dangerous tasks, but they’ll also be key to minimising damage if disaster strikes. Snake robots and the smart sensors they’re equipped with will be further optimised to capture real-time data to predict or quickly identify equipment malfunctions and closely track miners’ exact locations and vitals. With the aid of robots and new technology, the number of mining fatalities will be cut in half by 2020.
Mining is in the early stages of the Fourth Industrial Revolution, or Industry 4.0, and further digitisation is just around the corner.
TRANSPARENCY COMBATS CONFLICT
PREDICTION 2
EU CONFLICT MINERALS RULE
Supply chain transparency will take the compliance spotlight for 2020 as companies gear up for the European Union’s Conflict Minerals Rule, effective in 2021.
The EU’s efforts to stem trade in minerals that finance armed conflicts and terror groups will turn a spotlight on global mining companies’ supply chains by 2020.
The EU’s Conflict Minerals Regulation, effective in 2021, establishes supply chain due diligence for imports of tin, tantalum, tungsten, and gold (3TG)—used to produce phones, cars, and jewellery. The rule aims to ensure
European industries use responsiblysourced minerals, stemming proceeds that finance armed conflict in highrisk areas.
What the rule means for the mining industry:
EU-based 3TG importers and their international supply chain partners—smelters and refiners— will need to update their supply chain due diligence
Additionally, 3TG importers in the EU will need to identify the smelters and refiners in their supply chains, confirm their due diligence practices comply, and report insufficient supply chain due diligence
The Organisation for Economic Co-Operation and Development (OECD) laid out a five-step framework for the due diligence requirements:
Create strong company management systems
Identify and assess supply chain risk
Implement a program to respond to such risks
Conduct an independent thirdparty audit of supply chain due diligence
Submit annual reports on supply chain due diligence.
All upstream companies are subject to the due diligence requirements when they import—the riskiest area of the supply chain—as are downstream companies that import metal-stage products. This regulation will likely create a lowest common denominator effect across the global mining industry—for EU-based 3TG importers and their international supply chain partners—requiring the entire industry to put supply chain due diligence at the forefront.
HACKTIVISTS TARGET MINES
PREDICTION 3
CYBERSECURITY
By 2020, activist hackers will launch at least five cyberattacks on mines around the world in Permanent Denial of Service attacks aimed at eliminating the environmental and social threats they pose. They’ll use workers’ connected devices to initiate the attacks.
The mining industry is no stranger to environmental scrutiny. Advances in technology have introduced more sustainable mining methods, including the emerging practice of bioleaching, in which companies extract inerals by using biological assets instead of harmful chemicals. Despite those advancements, environmental concerns ersist, including water and soil contamination, carbon emissions, and impact on animal life. Pressure from environmentalist is set to increase by 2020. In fact, an emerging type of environmentalist—activist hackers (hacktivists)—will soon have their targets locked on the mining industry. By 2020, there will be at least five Permanent Denial of Service (PDoS) cyberattacks on mines around the world, motivated by eliminating the environmental and social threats they pose.
PDoS attacks are the next generation of Distributed Denial of Service (DDoS) attacks—which temporarily disable operations—and aim for permanent destruction. In a PDoS attack, hackers’ goals include destroying physical equipment and structures, disabling services, and/or wiping out data. For global mining companies in the early stages of harnessing big data, losing seismic and reserves data would be damaging to their ongoing operations.
While the rapid acceleration and adoption of new technology will be instrumental in bolstering mining’s future, it will also be the sector’s Achilles heel when it comes to cybersecurity. The industrial control system, the central hub controlling a mine’s automated operations, could serve as the hacker’s point of entry into the mine’s remote
operating controllers and connected devices. Damage and disruption to automated equipment could also jeopardise the safety of workers in the mines—as many of the systems in place are designed to monitor and
detect dangerous conditions.
COAL STRIPPED OF SOME POWER
PREDICTION 4
RENEWABLES
By 2020, renewables will account for one-quarter of the world’s electricity generation as dependence on coal wanes.
Decreased coal consumption in China—the world’s largest coal consumer—is slowing global demand for the commodity. According to the International Energy Agency, global coal consumption decreased about 2 percent last year. In confluence with the rapid growth of renewables, the world’s energy mix is set for a shakeup. By 2020, we predict that renewables will grow to account for one-quarter of the world’s electricity generation as dependence on coal wanes.
Mining plays an integral behindthe-scenes role in developing renewable energy. Electric vehicles, wind turbines, and solar panes rely on minerals like aluminium, copper, lithium, and various emerging, rare metals. Powered y new technology, deep-sea mining is allowing mining companies to tap into previously inaccessible reserves of copper, nickel, and cobalt, among others, beneath the ocean floor to fuel increased demand for these minerals.
In 2019, Nautilus Minerals, a Canadian mining firm, is set to launch one of the first large deep-sea mining ventures in the Bismarck Sea with the aid of remote-controlled robots. The excursion is forecast to produce more than 72,500 metric tons of copper and more than 4.5 metric tons of gold. The International Seabed Authority, a United Nations regulatory body, has granted 25 contracts to nations including China, India, Japan, and Brazil to embark on similar deep-sea mining projects.
By 2020, further advancements will be made to overcome one of renewables’ largest hurdles: energy storage. The world’s largest lithium ion battery—built by Elon Musk in November 2017—is a 100-milliwatt (MW) battery storage farm located in Australia. Come 2020, the capacity of energy storage is likely to evolve well beyond 100MW, solidifying renewables’ role in the world’s energy mix.
AN ARSENAL OF AUTOMATION BOOSTS PROFITABILITY
PREDICTION 5
IoT IN MINING
Global mining companies leveraging Internet-connected sensors and automated drillers in mines will decrease their per ton digging costs by more than 30 percent.
In an environment of subdued commodity prices, the value of harnessing technology is clear. Mining companies’ end consumers closely monitor the price of commodities and are sensitive to the slightest uptick. For automakers, for example, steel is a significant expense on their books. When multiplied by a few thousand metric tons, a variance of a few cents on steel price could incentivise automakers to find a new supplier. Global demand is not expected to wane. In fact, steel and mining company ArcelorMittal forecasts a 36 percent increase to automakers’ global demand for steel by 2020. However, which global mining companies win that business is up for debate.
Tapping into new technology is key to streamlining operations, reducing expenditure, and enabling companies to keep their prices competitive. The International Institute for Sustainable Development estimates driverless technology, for instance, increases mining output by 15 to 20 percent, while decreasing fuel and maintenance costs by 10 to 15 percent and 8 percent, respectively. Self-driving trucks are just the tip of the iceberg. Global
mining companies that digitise nearly all their drilling—relying on a combination of automated drillers and Internet-connected sensors—will recognise far more significant savings. By 2020, we predict global mining companies’ per ton digging costs will decrease by more than 30 percent because of automation.
These savings factor in reduced labour costs, increased output, a decrease in the number of safety incidents, and companies’ ability to enhance decision-making capabilities leveraging the vast amount of data collected by smart mines.
