Fathom Geophysics Newsletter 26
Industry conditions: Mining sector set to swoon further
THE Australian mining industry was a casualty of the US versus China trade-tariffs war by the end of 2019, and further ailing seems inevitable as the global economic effects of the coronavirus pandemic continue to unfold.
Our latest analysis of Australian Bureau of Statistics (ABS) data incorporates figures publicly available as at 13 April 2020.* We included 37 ABS economic time series in our analysis. 
US importation tariffs on billions of dollars worth of Chinese goods were imposed in stages between July 2018 and May 2019, and during that period China retaliated with its own tit-for-tat tariffs on US goods.  Since then the news media has been saturated with stories about how US sourcing managers have been spurning China and seeking factory service providers in other countries.    
Because of Australia's strong exposure to China's industrial demand for natural resources,  the Australian mining industry's overall activity level (see red line in Figure 1) and Australia's economy as a whole (see gray line in Figure 1, which represents Australian GDP, a proxy we use for comparison purposes) have been in a tailspin since the June 2019 quarter.**
Figure 1: Activity level of the Australian minerals exploration and mining industry (red solid line) compared to Australian income from gross domestic product (grey solid line). Data were sourced from the Australian Bureau of Statistics and were the latest available as at 13 April 2020. Results are plotted on a financial quarterly basis (x-axis) and are shown in terms of the number of standard deviations above or below average (y-axis) for the time period analyzed (from the June 2005 quarter up to and including the December 2019 quarter). Dashed lines denote a relatively greater amount of uncertainty, which arises inherently near series end-points upon calculation of 7-term Henderson moving averages. To view a larger version, click on either the image or this text link.
And while trade-war tensions de-escalated somewhat in January 2020 through an initial tariff-easing deal,  relief from economic woes probably won't arrive soon for Australia or its mineral resources industry, given strict stay-at-home measures undertaken in late 2019 and early 2020 around much of the world to try to slow the COVID-19 pandemic.  
The emergence of the novel coronavirus and its associated slackened consumer demand and belt-tightening among businesses of all sizes are likely to weigh heavily on the Chinese manufacturing and construction sectors' appetite for raw materials such as metals and their concentrates. China could end up with anemic GDP growth of between 1% and 2% in 2020, according to some analysts, or perhaps even zero net growth for the whole year if the worst-case scenario played out. 
The Reserve Bank of Australia's April 2020 chart pack showed precipitous falls of around 10% to 20% in graphs of year-ended growth for several economic indicators in China, including manufacturing purchasing managers' index, real retail sales, fixed asset investment, and residential property land purchases.
The picture of Australian resource sector malaise that's probably going to be painted in upcoming ABS quarterly data releases seems already evident in recent monthly commodity prices (see Figure 2).
Figure 2: Chart showing the fluctations in monthly metals commodity prices between January 2005 and March 2020 for iron ore (dark-red solid line), copper (orange solid line), gold (yellow solid line), nickel (purple solid line), zinc (blue solid line), aluminum (pink solid line), lead (light-olive-green solid line), tin (teal-green solid line), platinum (dark-green solid line), and silver (pale-gray solid line). Metal prices have been deflated by the consumer price index (all items, US city average, all urban consumers) and respresented as Z-scores (i.e., the number of standard deviations above or below the average for the period studied). Also shown is a simple arithmetic average of the above 10 monthly metals prices (black finely-dotted line). For comparison purposes, also plotted are 7-term Henderson moving averages of the Australian mining industry's quarterly activity level (red-filled circles), its quarterly inventories (black-filled triangles), and quarterly total actual private new capital expenditure for mining (pale-gray area columns). Data sources: World Bank, Federal Reserve Bank of St. Louis, and Australian Bureau of Statistics. To view a larger version, click on either the image or this text link.
The months of April and May 2019 — which were the first couple of months after the USA and China exchanged a pair of tariff grenades — were about when a crossover occurred in the Australian mining industry's softening activity level (see red-filled circles in Figure 2) and its surging inventories (see black-filled triangles in Figure 2).
And since then gold prices (see yellow line in Figure 2) have been soaring due to investors' collective impulse for safe-haven buying during times of global economic uncertainty and in an environment of ubiquitous rock-bottom interest rates.  
While the strong gold price has buoyed resource companies' interest in gold exploration, explorers looking to carry out new raisings currently face a tough stock-market audience and a workforce jittery about being squeezed out by automated technologies.   
Spending curtailed as inventories skyrocket
We are seeing a classic-economics-textbook profile of a sector downturn in the various mining industry-related subindexes we generate as part of our industry conditions analysis.
As at the end of the December 2019 quarter the industry was experiencing burgeoning inventories (see green line in Figure 3), in conjuction with falling sales (see salmon line in Figure 3), exports (see purple line in Figure 3), and production and income (see gold line in Figure 3).
The industry seems to have been quite responsive to the developing situation over the past 12 to 18 months, because its expenditures (see blue line in Figure 3) were reined in at around the same time inventories began their steep climb in early 2019.
And looking more broadly, from 2013 to 2018 the industry seems to have avoided the wild gyrations in inventory that were a hallmark of the 2005 to 2012 period.
Figure 3: Mineral commodity demand-side and supply-side subindices: Production and Income, Expenditure, Exports, Sales, Inventories. Also shown is the unusualness or turbulence of the industry's situation, as defined by the Mahalanobis distance. Data were sourced from the Australian Bureau of Statistics and were the latest available as at 13 April 2020. Results are plotted on a financial quarterly basis (x-axis) and are shown in terms of the number of standard deviations above or below average (y-axis) for the time period analyzed (from the June 2005 quarter up to and including the December 2019 quarter). Dashed lines denote a relatively greater amount of uncertainty, which arises inherently near series end-points upon calculation of 7-term Henderson moving averages. To view a larger version, click on either the image or this text link.
Profits and profit margin falter
The mining industry's corporate profits before income tax (see red solid line in Figure 4) came off the boil around the first quarter of 2019, which may have been the trigger for the sector's reining in of its expenditures.
The industry's profit margin — the ratio of gross operating profits to sales — is back to below-average territory (see red dotted line in Figure 4). The last time it was there was in mid-2017.
Even though the sector's spending is down (see blue line in Figure 4), its wages and salaries have so far remained unaffected (see black line in Figure 4). According to the current ABS data on hand, wages and salaries have continued to trend in a level fashion at about the study-period's average since the latter half of 2017. We should keep in mind that the last couple of data points for wages and salaries may shift if any significant revisions are included in future ABS data releases.
Figure 4: Profitability measures for the mining industry (red lines), namely corporate profits before income tax (solid red line labeled CPBIT-M), company gross operating profits (dashed red line labeled CGOP-M), and the ratio of business gross operating profits to sales (dotted red line labeled RAT-BGOP/S-M). Also shown for comparison purposes are the expenditure subindex (blue line), the inventories subindex (green line), and wages and salaries for mining (black line). Data were sourced from the Australian Bureau of Statistics and were the latest available as at 13 April 2020. Results are plotted on a financial quarterly basis (x-axis) and are shown in terms of the number of standard deviations above or below average (y-axis) for the time period analyzed (from the June 2005 quarter up to and including the December 2019 quarter). Note that a relatively greater amount of uncertainty arises inherently near series end-points upon calculation of 7-term Henderson moving averages. To view a larger version, click on either the image or this text link.
Exploration drilling enthusiasm dampened
Sagging average export prices in recent quarters (see dotted green line in Figure 5) have coincided with a decrease in the Australian mining industry's mineral exploration activity in terms of exploration meters drilled (see dashed brown line in Figure 5). When it comes to the number of meters drilled, 2019 looks similar to 2015, which was when the industry was still plodding through a multi-year case of economic doldrums.
Figure 5: Average export price (green dotted line), which is the average of (1) the export price index by balance of payments classification of exports for metal ores and minerals, and (2) the export price index by balance of payments classification of exports for metals excluding non-monetary gold. Also shown is non-petroleum mineral exploration activity in terms of exploration meters drilled (dashed brown line, obtained by averaging the meters drilled at new deposits and the meters drilled at existing deposits), and exploration expenditures (solid brown line, obtained by averaging expenditures at new deposits and expenditures at existing deposits). The activity level of the Australian minerals exploration and mining industry (gray solid line) is included for comparison purposes. Data were sourced from the Australian Bureau of Statistics and were the latest available as at 13 April 2020. Results are plotted on a financial quarterly basis (x-axis) and are shown in terms of the number of standard deviations above or below average (y-axis) for the time period analyzed (from the June 2005 quarter up to and including the December 2019 quarter). Note that a relatively greater amount of uncertainty arises inherently near series end-points upon calculation of 7-term Henderson moving averages. To view a larger version, click on either the image or this text link.
But in contrast to 2015, the industry paid a lot more for its 2019 meters (see solid brown line in Figure 5). The last time spending on drilling occurred to this degree was back in 2011, when the industry was acting like a drunken sailor (see Figures 3 and 4 of this write-up).
This current prominent gap between drilling expenditures and the number of meters drilled means drilling is relatively expensive. The last time drilling 'bang-for-buck' was this unfavorable for explorers was back in the so-called 'commodities super-cycle' days of the mid 2000s.
* We came up with our data analysis because we wanted a formalized, agnostic and at least semi-realistic snapshot of the state of the industry, instead of relying on statistics like Diggers and Dealers attendance figures, idle drill-rig counts, Gina Rinehart's current net worth, or the price of coffee in Perth, Australia. It's our hope that our industry activity index, our industry turbulence index, and our group of demand-side and supply-side subindices spark useful debate and discussion. Please note that the results of our analysis and our discussion of them should not be regarded in any way as advice (e.g., investment advice, financial planning advice, career advice, and so on). If you choose to act upon the information contained in the above material, then be it upon your own head.
** Keep in mind that the various ABS time series we rely on are subject to upward or downward revisions with each new data release (which is inherent in doing economic surveys). Revisions tend to be only quite minor, and tend to affect only the most recent quarters. But if enough small revisions occur, and if they tend to occur together in one direction (e.g., mostly upward, or mostly downward), then that can significantly reset industry trends seen in the final analysis. It means, for instance, that once all of the next quarter's datasets are made completely available, we may end up seeing a re-jigging of the trends we're currently examining and pondering about in this write-up.
 Note: The 37 ABS economic time series included in our analysis were:
- Company Profits Before Income Tax: Mining
- Company Gross Operating Profits: Mining
- Ratio of Business Gross Operating Profits / Sales: Mining
- Income From Sales of Goods and Services: Total: Mining
- Income From Sales of Goods and Services: Total: Professional, Scientific and Technical Services
- Income From Sales of Goods and Services: Total: Construction
- Engineering Construction: Value of Work Done: By the Private Sector For the Private Sector: Oil, Gas, Coal and Other Minerals
- Export Price Index: Metal Ores And Minerals
- Export Price Index: Other Minerals
- Export Price Index: Metals (Excluding Non-Monetary Gold)
- Mineral Exploration (Other Than For Petroleum): Expenditure: New Deposits
- Mineral Exploration (Other Than For Petroleum): Expenditure: Existing Deposits
- Mineral Exploration (Other Than For Petroleum): Metres Drilled: New Deposits
- Mineral Exploration (Other Than For Petroleum): Metres Drilled: Existing Deposits
- Gross Value Added By Industry: Mining: Iron Ore Mining
- Gross Value Added By Industry: Mining: Other Mining
- Gross Value Added By Industry: Mining: Exploration And Mining Support Services
- Period Average Exchange Rates, Units of Foreign Currency per Australian Dollar: Trade-Weighted Index
- Period Average Exchange Rates, Units of Foreign Currency per Australian Dollar: United States Dollar
- Private New Capital Expenditure and Expected Expenditure, Australia: Actual Expenditure: Total: Mining
- Wages and Salaries: Mining
- Merchandise Exports: Iron Ore and Concentrates
- Merchandise Exports: Gold, Non-monetary (Excl. Gold Ores and Concentrates)
- Merchandise Exports: Copper Ores and Concentrates, Copper Mattes and Cement Copper
- Merchandise Exports: Copper
- Merchandise Exports: Silver, Platinum and Other Metals of the Platinum Group
- Merchandise Exports: Aluminium Ores and Concentrates (Incl. Alumina)
- Merchandise Exports: Aluminium
- Merchandise Exports: Nickel Ores and Concentrates, Nickel Mattes, Nickel Oxide Sinters and Other Intermediate Products
- Merchandise Exports: Nickel
- Merchandise Exports: Ores and Concentrates of Base Metals (Excl. of Iron, Copper, Nickel, Aluminium, Uranium and Thorium) Not Elsewhere Specified
- Merchandise Exports: Lead
- Merchandise Exports: Zinc
- Merchandise Exports: Sum of AHECC Chapter 26 Codes Confidentialised with Broad Commodity Details Restriction
- Merchandise Exports: Crude Minerals (Excl. Coal, Petroleum, Precious Stones, Stone, Sand, Gravel, Sulphur, Unroasted Iron Pyrites and Natural Abrasives) Not Elsewhere Specified
- DERIVED METRIC: Merchandise Exports: TOTAL
- Inventories: Mining
Note that some of the above time series include data provided to the ABS from entities working in the oil and gas sector, as well as the coal-mining sector. Hence our analysis contains influences from these sectors and their prevailing current market conditions.
We used the ABS chained consumer price index to deflate the above time series data, where applicable.
We didn't include in our calculations any ABS data about national GDP. However, we do display Australian GDP in our graphs as a reference for discussion purposes.
The technique we used to analyze the data is called Multichannel Singular Spectrum Analysis (MSSA), which is equivalent to Extended Empirical Orthogonal Functions (EEOF) analysis. See, for example, the following seminal publication and further literature citing it: D.S. Broomhead and G.P. King (1986) "Extracting qualitative dynamics from experimental data", Physica 20D, 217-236.
 BBC News (16 Jan 2020) "A quick guide to the US-China trade war".
 M. Schuman (25 Jun 2019) "Trump's trade war with China is already changing the world", The Atlantic.
 F. Bermingham (31 May 2019) "Explainer: China's manufacturing outlook weakens showing economic slump is yet to hit bottom", Politico (online reprint of South China Morning Post article).
 E. Barrett (7 Jun 2019) "Manufacturers are considering leaving China. But it isn't all because of the trade war.", Fortune.
 D. Wei and J. Hong (9 Jul 2019) "Walmart's supplier says chinese factories in 'desperate' state", Bloomberg.
 J. Woetzel, J. Seong, N. Leung, J. Ngai, J. Manyika, A. Madgavkar, S. Lund, and A. Mironenko (July 2019) "China and the world: Inside the dynamics of a changing relationship", McKinsey Global Institute.
 G. Crossley (21 Jan 2020) "Many of China's provinces cut 2020 GDP growth targets despite easing trade tension", Reuters.
 E. Barker, M. Stanley, and M. Pritchard (13 Feb 2020) "Mining markets facing growing uncertainty as coronavirus spreads", ABC News.
 D. Claughton, C. Fowler, and D. Fitzgerald (6 Apr 2020) "Mining exploration and service companies hit by coronavirus restrictions", ABC News.
 L. He (1 Apr 2020) "China's economy may not grow at all in 2020. That hasn't happened in 44 years.", CNN.
 R. Pupazzoni (1 Jan 2020) "Global uncertainty and economic slowdown see gold shine and the rally is expected to continue", ABC News.
 J. Lucas (3 Dec 2019) "New golden frontier in Western Australian desert as precious metal shines near record highs", ABC News.
 J. Lucas (6 Nov 2019) "Gold prices are trading near record highs, so why are Australia's mineral explorers crying poor?", ABC News.
 B. Fitzgerald (8 Sep 2019) "New WA mining boom brings automation to the fore, but the unions aren't happy", ABC News.
About Fathom Geophysics
In early 2008, Amanda Buckingham and Daniel Core teamed up to start Fathom Geophysics. With their complementary skills and experience, Buckingham and Core bring with them fresh ideas, a solid background in geophysics theory and programming, and a thorough understanding of the limitations of data and the practicalities of mineral exploration.
Fathom Geophysics provides geophysical and geoscience data processing and targeting services to the minerals and petroleum exploration industries, from the regional scale through to the near-mine deposit scale. Among the data types we work on are: potential field data (gravity and magnetics), electrical data (induced polarization and electromagnetics), topographic data, seismic data, geochemical data, precipitation and lake-level time-lapse environmental data, and remotely-sensed (satellite) data such as Landsat and ASTER.
We offer automated data processing, automated exploration targeting, and the ability to tailor-make data processing applications. Our automated processing is augmented by expert geoscience knowledge drawn from in-house staff and from details relayed to us by the project client. We also offer standard geophysical data filtering, manual geological interpretations, and a range of other exploration campaign-related services, such as arranging surveys and looking after survey-data quality control.