Mining heavyweights say little respite in store for for bruised sector

Corporate leaders say the prospect of commodity prices remaining at record lows for several years should spur the federal government to improve labour productivity and simplify regulation to allow the besieged mining sector to start to recover in 2016.

Business heavyweights Leigh Clifford, Malcolm Broomhead and Don Argus said there was little respite in sight for Australia's mining sector as waning Chinese demand for commodities and a glut of new iron ore, coal and liquefied natural gas supplies, push prices to multi-year lows.

Falling demand from China and a glut of coal is helping to push prices to record lows.
Falling demand from China and a glut of coal is helping to push prices to record lows.  Photo: Martin Divisek

Mr Clifford, the chairman of Qantas and a former chief executive of Rio Tinto, said Australia needed to recognise that the low ebb in commodity prices may linger until the end of the decade due to the lack of any near-term stimulus to reboot prices.

"I think it might be a period of more subdued prices which we're facing for the next three to five years to be honest," said Mr Clifford, who also advises private equity giant KKR. "There's a belief that the situation at the moment in the resource industry is an anomaly. But the reality is it's probably more the norm in terms of prices. Ten years ago I said there's going to be speed bumps along the way and we've just hit a speed bump."

Iron ore, Australia's biggest mineral export, slumped below $US40 a tonne in December taking the year's losses to 40 per cent as mining giants including Australia's Rio Tinto and BHP Billiton raised output amid stalled demand from China. 

The government's mid-year budget update in December forecast ballooning deficits with $7 billion written off the forward estimates period as a result of the plummeting iron ore price. Oil tumbled by 35 per cent in 2015 although that proved a boon for some industries with Qantas on track to report a bumper, first-half profit of $900 million partly due to lower fuel prices.

Advertisement

Copper barometer down 25pc

Coking coal, Australia's second largest export, lost nearly a third of its value while copper, seen as a barometer of the global economy's health, finished the year down 25 per cent.

Malcolm Broomhead, a BHP Billiton director and chairman of ports operator Asciano and explosives manufacturer Orica, agreed that low prices were likely to linger. He said business must now work with the government to rebuild confidence in the economy.

"There's been a slight uptick in confidence towards the end of the year but people are waiting for the government to actually deliver on some of the perceived initiatives," Mr Broomhead said. "We've actually got to see the rubber hit the road pretty soon if Australia is going to have a good, prosperous year."

Mr Broomhead said the broader issue of labour productivity needed to be fixed in 2016 to let corporate Australia compete effectively on a global stage.

"The only thing that will lift us in the post mining-boom era is going back to what we did well in the second half of the 1980s and early 1990s which was the focus on productivity improvement," he said. "It will be very important to see changes in the area of tax reform, industrial relations, infrastructure and just trying to tackle the age-old problem of too much regulation. In other words, the things that go to productivity." 

Former BHP chairman Don Argus said the cyclical nature of commodities meant the mining industry would face a tough test over the next few years.

"We've had a long period of goodies. Make no mistake, Australia has done very well off the China phenomena. But the cycle turns and it is only natural that those individuals that have benefited from that phenomenon will slow too."

Shareholder pressure

He said the next few years were likely to test the mining sector as their allocation of capital came under the spotlight from shareholders.

"We have short memories and those that are stewards of the capital, if they haven't recognised the cyclicality of these commodities, then they are going to burn some capital. That's the danger we face."

Mr Clifford echoed his former rival's warning and said mining companies not in the bottom quartile on costs may suffer.

"Given the global economic situation you'd have to say the prospects for any dramatic surge in pricing is pretty limited. I think the economy in China is going through a readjustment period. A low-cost producer is a good place to be but if you're a high-cost producer, life is going to be pretty tough."