Pic: Darrian Traynor via Getty Images
Mining
The great pre-election budget of 2022 has come and gone and Treasurer Josh Frydenberg has packed up the papers ready for him and PM Scott Morrison to unleash some cashed-up promises in marginal seats before the polls open.
The Lamington was as sweet and sickly as promised, a $420 bump on the Low and Middle Income Tax Offset (LMITO) pumping some extra dosh into the pockets of 10 million Aussies so they can afford the fuel to drive to a booth on election day.
Speaking of gas, the temporary fuel excise cut from 44.2c to 22.1c a litre was there as planned as well.
The Feds are wielding a near trillion buck national debt, but say since the mid year review its estimated underlying cash balance has improved by $103.6 billion over the five years to 2025-26.
The deficit for 2021-22 has dropped from $99.2b in MYEFO to $79.8b, falling year on year to $43.1b by 2025-26 (against a MYEFO prediction of $68.1b).
It projects a halving of the deficit to 1.6% of GDP by 2025-26 before falling to 0.7% by the end of the medium term.
Wage growth looks better depending how you swing it, and how honest you are about inflation going forward.
But there was a little bit in there for the miners too. What sweets did Australia’s resources industry pick up from the sugar hit budget?
The Pilbara will be pumped with $1.5 billion of investment in a bid to turn it into a powerhouse of both the mining and low emissions industries like hydrogen.
It is one of four regions to get a cut of $7.1b over 11 years for “next generation energy hubs” along with the Northern Territory, North and Central Queensland and the Hunter in New South Wales as part of the “Energy Security and Regional Development Plan”.
The plan will include investment in generation and grid infrastructure in Australia’s mining heartland, $200 million in a supply chain for low emissions manufacturing facilities including for hydrogen, ammonia and carbon capture, an upgrade to Lumsden Point at Port Hedland and an upgrade to the Tanami Road.
Chamber of Minerals and Energy WA director of policy and advocacy Rob Carruthers said he was pleased the government was willing to back plans to diversify the Pilbara’s role in the resources economy.
“We think it shows good ambition and the Pilbara has been the powerhouse of the national economy for some time now, not least in a COVID pandemic, and underpinned strongly by the world’s most significant iron ore and gas sectors,” he said.
“But there’s more to be developed there and we’ve seen some critical and battery minerals being developed in the North West and the nascent opportunities in converting renewable energy to ammonia or hydrogen exports is substantial.
“The fact that the government’s willing to back that and back the Pilbara as an export hub is to be applauded.”
Canberra also plans to support the building of industries further downstream through the program. The Pilbara iron ore sector is a virtual conveyor belt to China, where the value is added downstream in the steel and manufacturing sectors.
“So there’s work going on across various levels of government. And this has really to be unlocked by major renewables, so low cost and low emissions energy inputs to really realise the ambition in value adding of iron ore,” Carruthers said.
“It’s been tried in the past and failed, despite those best efforts, but going forward it’s a clear opportunity to add value to iron ore before we export it.
“That won’t be homogenous for all iron ore that’s produced currently, but if you look particularly at magnetite ores, the opportunity to process those into pellets or downstream products can really add additional value before we export it to customers.”
Most of the big ticket items carried forward into the budget for juniors, including a $2 billion critical minerals fund, $200 million critical minerals accelerator strategy and $2 billion increase to funding in the Northern Australia Infrastructure Facility were already known well ahead of time.
Funds have already started to flow to junior miners including the $120 million grant for the Pure Battery Technologies nickel precursor plant in Kalgoorlie and $49 million for Australian Vanadium’s (ASX:AVL) project in the Mid West.
But Warren Pearce, CEO of the Association of Mining and Exploration Companies, said junior miners and explorers would come out better than expected from the budget.
Pearce says the key for the junior resources sector was the announcement of increase in skilled visa numbers given how starved the industry has been for labour.
Net overseas migration declined by 89,900 in 2020-21 as borders shut during the pandemic, but is projected to hit 41,000 in 2021-22, 180,000 in 2022-23 and 213,000 in 2023-24 as it unwinds.
“They’ve increased the caps quite substantially. So there’s another 13,000 skilled places, being brought in with the overall migration program up to 160,000 places, which is actually really good,” Pearce said.
“And for an industry that’s desperate for skilled people that’ll help us address some of those challenges.
“Increasing that component’s a very big deal for us. They’ve doubled the regional visas, up to 25,000 places and that’ll certainly be something the resource sector will take advantage of.”
The CME’s Carruthers cautioned the CME doesn’t see the skills shortage unwinding for several years to come however, with “optimisic” skilled migration targets still 50,000 below pre-pandemic numbers.
“The additional investment of $2.8 billion in an additional 8000 apprentice take-ups and completions will make a difference, as will additional investment for small businesses to train their staff as well. But beyond that, there’s clearly going to be a skills shortage and acute crunch over the forward years,” he said.
“We don’t predict the skills challenges will get any easier for a number of years and could peak sometime in 2023-24.
“So it’s fundamental that we can see and target skills from overseas and whilst this budget has an optimistic revision around net skilled migration returning to 213,000 by 2024, that’s still 50,000 short of pre pandemic levels.
“So there is going to need to be a concerted effort there to target the best and brightest to come to Australia and build a life and work here.
Pearce said infrastructure investments across the country would improve access for junior miners, including the upgrade of the Tanami Road and Lumsden Point as part of the Pilbara investment package, and additionally funding for sealing the Outback Way that runs past the Gruyere Gold mine in WA across to the other side of the country.
“I think we’ve done probably better than we would have expected. There’s quite a lot of large infrastructure spending targeted at key economic infrastructure,” he said.
“Western Australia will pick up an upgrade to Lumsden Point at Port Hedland, which you’d expect to take some constraints out of there over time and create some opportunities for juniors to export or even future hydrogen players.
“And there’s money going towards the Outback way and the Tanami by the sealing of those, both of which are pretty important access points for remote exploration.”
For the first time in forever the Coalition could see its Liberal stronghold in WA blasted to smithereens on account of the runaway popularity of the hermit kingdom’s Labor Premier Mark McGowan.
In that context its free-spending attitude towards WA and in particular its fealty to the Pilbara is unsurprising in its bid to protect votes in the Wild West.
Without its iron ore wealth this budget could have been in a dire state.
Australia’s recovering nominal GDP growth for 2021-22 has increased from 6.5% at the MYEFO to 10.75% on budget day. And in large part Frydo has WA’s mineral riches to thank with a little sprinkling of runaway coal prices.
Non-rural commodity exports were $5.6b higher than expected in the December quarter and prices for iron ore, LNG, met coal and thermal coal have gone even higher since then.
Unlike the deadbeat dad from the House of the Rising Sun, Canberra forecasters are not gambling men and have taken a typically boring approach to commodity prices, predicting a crash in FOB iron ore prices from US$134/t to US$55/t by the September quarter.
They see met coal slipping from US$512/t to US$130/t and thermal coal from US$312/t to US$60/t by the end of the third quarter.
As always China is the key.
“The Chinese economy poses another key uncertainty for the terms of trade. Strength in fixed asset investment in China, spurred by loosening fiscal and monetary policy may mean iron ore prices stay higher for longer than expected,” Treasury says.
“On the other hand, a faster-than-expected slowdown in the Chinese economy, such as due to economic disruptions from a widespread COVID-19 outbreak, could push the prices of Australia’s key exports lower than assumed.”
If prices in key commodities stay strong ’til September and only decline by March next year, that will mean big bucks for whoever wins the upcoming election, something that could well happen given few if any trading desk analysts are as bearish on either iron ore or coal.
In that instance GDP will be $135.2b higher over 2021-22 to 2024-25 with tax receipts increased by $29.5b.
There are some other tasty figures for mining folk in there. Mining investment is expected to spike by 9.5% in 2022-23 before dropping to 1.5% a year later after rising by just 0.5% in 2021-22.
Mining exports are up 1% in 2021-22 and expected to rise 5% in the coming year amid expectations the major iron ore miners will address production issues, before dropping to a 2.5% increase in 2023-24 as latent capacity is eaten up.
“Based on the data we’ve got here in Western Australia, there’s $127 billion in that project pipeline across mining and resources,” Carruthers said.
“And so we’ve got an optimistic view that given current commodity cycles, and if we can solve the skills challenges and navigate our way efficiently through government regulatory approvals and the like, that we can realise some increase in delivery of key project investment.”
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