Resource World Magazine

AUST R ALIAN UP DAT E Chinese economy cooling, but still in business by Greg Barns Most Australian miners and explorers will tell you that if China cranked up their economic growth, money would flow into the commodities markets again.   In the decade 2001 to 2011, Australian mining and energy producers experienced phenomenal growth in the volume and value of exports to China. According to the Australian Department of Foreign Affairs and Trade " Australia's resource and energy commodity exports rose from A$3.9 billion in 2001… to A$62.4 billion in 2011." But the cooling Chinese economy and Beijing's desire to see an increase in consumption spending as opposed to infrastructure spending has seen coal and iron ore prices in particular decline in the past two years and the profitability of Australian-based miners drop accordingly.  Global accounting firm PwC has just released its 2013 mining survey and found that predictions made a year earlier, that Australia's mid-tier iron ore producers would be wiped out by the decline in demand from China, have been overstated. PwC says that demand "from China continued to rise as data demonstrated no signs of a hard landing and sentiment, although fragile, has improved as the new government gets on with the job of rebalancing the economy to make its growth more sustainable over the long-term." While revenue for the 2012-2013 financial year (July 1 - June 30) was down A$521 million, the "mid-tier iron ore miners made light work of overcoming the shortfall in price, achieving an impressive 45% increase in production in 2013," PwC notes. PwC singled out BC Iron [BCI-ASX], which has a joint venture at Nullagine in Western Australia with Fortescue Metals Group [FMG-ASX], Arrium [ARI-ASX], Mount Gibson Iron [MGX-ASX] and Mineral Resources [MIN-ASX] as the stand-out performers in difficult circumstances.  The coal story is not as sanguine. Mid-tier coal producers in Australia have sustained a $1 billion fall in revenue with Whitehaven Coal [WHC-ASX] "the only coal miner in the mid-tier 50 that managed to avoid a shrinking top line, holding steady at $0.6 billion on the back of a 34% increase in production," PwC found. There is, emerging in Australia, a view among some prominent commentators and analysts that China still has much to offer Australian miners. Justin Smirk, Chief Economist of Westpac, DECEMBER/JANUARY 2014 RW December 2013.indd 49 an Australian bank, told a conference in Brisbane in October this year: "The commodities super cycle may have peaked but it hasn't ended. In the early days, it was completely missed by the miners and they raced to catch up [to the demand]. Then came cost blowouts as they tried to catch up. Now it's about productivity and "Mid-tier iron ore miners achieved an impressive 45% increase in production in 2013 – PwC" cost controls…it's no longer about putting in mines at any cost to get the stuff out of the ground as fast as possible," Smirk said. Smirk noted, however, that there would be more price volatility in iron ore and coal prices. Iron ore and coal giant BHP Billiton [BHP-ASX] thinks Chinese demand is still going to drive Australian mineral exports. At its AGM in November, Chairman Jac Nasser said that his company "believes the Chinese government has the room and flexibility to pursue reforms that support its policy of stable, long term growth. We expect the Chinese economy to grow at over 7% next year," Nasser said. On the other hand, respected international consulting firm Business Monitor, in a report released November 5, was pessimistic on Australian mining stocks that export to China. "With China's economy on course for a rude slowdown over the coming years, Australia's mining sector is set to suffer the painful spill-over effects of a sharp investment slowdown," the report said. Business Monitor says mining will still grow in Australia at an annual rate of 4.3% up to 2017, but this has to be contrasted with the nearly 25% annual growth of the past decade. The bottom line seems to be that if Australian coal and iron ore miners are prudent in their use of cash and costs are kept under control they will still find China a fertile market. But the salad days of the China boom are likely over. n www.resourceworld.com 49 12/11/2013 6:12 PM

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