Fathom Geophysics Newsletter 27

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Industry conditions: Australian mining industry sends out green shoots, for now

THE Australian mining industry reached a low ebb point in the March 2020 quarter, but may be on the mend if nascent monthly metals prices are any indication. Even so, further waves in the coronavirus pandemic still have the potential to ruin things for everyone.

Our latest analysis of Australian Bureau of Statistics (ABS) data incorporates figures publicly available as at 1 July 2020.* We included 37 ABS economic time series in our analysis. [1]

The Australian mining industry's overall activity level wallowed further into the mire during the March 2020 quarter (see red line in Figure 1) as did Australia's economy as a whole (see gray line in Figure 1, which represents Australian GDP, a proxy we use for comparison purposes).**

Figure 1Figure 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 1 July 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 March 2020 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.

This latest downturn looks every bit as serious as the worst parts of the industry's four-year-long hike through the wilderness between 2012 and 2015. The March 2020 quarter economic statistics contain the start of the economically devastating effects of the COVID-19 global pandemic. Long-lasting effects on Australia's state and national economies are expected. [2] [3]

The industry's dive began in earnest from the June 2019 quarter onwards. But the seeds of the industry's travails were sown in early 2018, when the USA began implementing a series of import tariffs that were principally aimed at China's export goods. Tariffs tend to be iffy weapons. As was seen in previous trade wars between the USA and Japan and Korea, arguably the primary result of the construction of tariff walls has been an increase in US consumers' and producers' costs. [4] [5]

The road ahead will probably be bumpy, and only hard-bitten speculators truly welcome the rollercoaster ride of volatility. Commodity markets pundits and prognosticators turn to prices seen in futures markets in times like this, to help them read the tea leaves. [6] Perhaps there is reason to be optimistic: recent key metals seem to already be showing signs of reverting to their respective mean prices (Figure 2).

The exception to the recent metals-price drama is the gold price (see yellow line in Figure 2), which, because it's treated by many as safe haven in uncertain times, has sailed through the last 12 months on an elevated trajectory.

Figure 2Figure 2: Chart comparing the fluctuations that have happened since 2005 for Z-scores calculated for the monthly value of China's merchandise exports to the rest of the world (narrow orange solid line), the monthly value of China's merchandise imports from the rest of the world (orange finely-dotted line), the strength of the Chinese yuan (thick orange solid line), the simple arithmetic average of Z-scores for the monthly FOB value of all-merchandise-type exports to 9 of Australia's export destinations (pale purple dashed line) (those destinations are China excluding SARs and Taiwan; Japan; South Korea; United Kingdom/Channel Islands/Isle of Man; USA; India; Singapore; Taiwan; and Vietnam), and the simple arithmetic average of Z-scores for the 10 monthly metals prices shown in an earlier figure in this write-up (black 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) and its quarterly inventories (black-filled triangles). Note that China's import figures, export figures, and yuan-valuation figures have not been seasonally adjusted (the Chinese New Year holiday period occurs at around January and February of each year). China's trade figures have been deflated by China's monthly not-seasonally-adjusted CPI. Data sources: World Trade Organization, 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.

Leading the strengthening performance of the base-metals bunch is iron ore, whose inventories are said to have been quickly dwindling on Chinese shores, at the same time that South American supplies are undergoing a coronavirus-related bottleneck. [7] [8]

China has responded to this looming short-run sellers-market situation by thumping its chest under the pretext of a coronavirus-related diplomatic spat, and threatening to tie up iron ore producers with greater bureaucratic red tape, such as more stringent import inspections. [9] More about this later in this write-up.

Industry caught in a holding pattern

Subindexes that describe the internal goings-on behind the Australian mining industry's recent activity levels reveal a picture in which the industry seems to be in a meandering-around-the-average pattern (Figure 3). It's almost as if there's some breath-holding going on.

Inventories that looked drastically high in our analysis of the final quarter of 2019 (back in our April 2020 write-up) have been revised downward to only slightly above their study-period average (see green line in Figure 3).

More worrisome is that the sales subindex (see salmon line in Figure 3) is plumbing depths more pronounced than those we saw during our analysis of the previous quarter's industry statistics. The sales subindex seems to have leading-indicator behavior to it relative to the other subindexes. So the tidings for industry may involve 'interesting' times ahead with respect to exports (see purple line in Figure 3), and production and income (see gold line in Figure 3).

The industry seems to have been relatively responsive in recent quarters when it comes to curbing expenditures (see blue line in Figure 3) during a time of uncertainty. That subindex looks like it's back down to around its average.

Figure 3Figure 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 1 July 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 March 2020 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.

The pullback in industry expenditures doesn't seem to have come at the expense of workers' wages and salaries (see black line in Figure 4), which remained steady at around average levels. The steadiness in that particular measure may be because during the March 2020 quarter the Australian mining industry was in a better position than other sectors to remain operational during the early part of the COVID-19 pandemic. [10]

The industry's profit levels (see red solid, dotted, and dashed lines in Figure 4) went through a local peak back in late 2018 and early 2019 before a minor road-bump in the form of expenditures took hold (see blue line in Figure 4) in the second and third quarter of 2019.

Figure 4Figure 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 1 July 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 March 2020 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.

Another factor hobbling industry profits from the second and third quarter of 2019 onward has been the softening export prices on average (see green dotted line in Figure 5). It was around that time that mineral exploration was looking quite expensive, as indicated by the quite high level of expenditure (see solid brown line in Figure 5) even though exploration in terms of meters drilled remained more subdued (see dashed brown line in Figure 5). All three of these measures were distinctly off the boil in the March 2020 quarter.

Figure 5Figure 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 1July 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 March 2020 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.

Figure 6 shows just a few of the complex interlinkages in the global economy that have the power to affect the Australian mining industry's activity level.

Figure 6Figure 6: Chart comparing the fluctuations that have happened since 2005 for Z-scores calculated for the monthly value of China's merchandise exports to the rest of the world (narrow orange solid line), the monthly value of China's merchandise imports from the rest of the world (orange finely-dotted line), the strength of the Chinese yuan (thick orange solid line), the simple arithmetic average of Z-scores for the monthly FOB value of all-merchandise-type exports to 9 of Australia's export destinations (pale purple dashed line) (those destinations are China excluding SARs and Taiwan; Japan; South Korea; United Kingdom/Channel Islands/Isle of Man; USA; India; Singapore; Taiwan; and Vietnam), and the simple arithmetic average of Z-scores for the 10 monthly metals prices shown in an earlier figure in this write-up (black 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) and its quarterly inventories (black-filled triangles). Note that China's import figures, export figures, and yuan-valuation figures have not been seasonally adjusted (the Chinese New Year holiday period occurs at around January and February of each year). China's trade figures have been deflated by China's monthly not-seasonally-adjusted CPI. Data sources: World Trade Organization, 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.

In general, the activity level of the Australian mining industry (see filled red circles in Figure 6) takes much of its cues from global metals price levels (see dotted black line in Figure 6) and from how much the industry is able to export (which since the late 2000s has been a substantial subset of Australia's total merchandise exports, represented by a pale purple dashed line in Figure 6).

At any given time, the world's thirst for the Australian mining industry's production is a reflection of how high or low global inventories are for those metals and their ores (and how rapidly they are building up or being depleted), which in turn depends to a large degree on the levels of Chinese commodity imports (which since the late 2000s has been a substantial subset of China's total merchandise imports, shown as a finely-dotted orange line in Figure 6). China's imports are generally strongly dependent on the strength of the yuan (see thick orange solid line in Figure 6), which waxes and wanes in response to the level of demand for the yuan, which (in theory, according to a balance-of-payments view of exchange rates) is largely related to the world's demand for Chinese goods.

Starting in about April 2018 through to the present time the strength of the yuan has been plummetting (see thick orange line in Figure 6). During the same stretch of time, the US dollar-denominated value of China's exports to the world has burgeoned (see narrow orange line in Figure 6). If what we're seeing in our plot is real, this may mean that China's merchandise is looking relatively inexpensive to many of China's trading partners and they're on a buying spree. This interpretation seems supported by the fact that in 2018 and 2019 the value of China's exports outpaced the value of the world's aggregate exports (see purple-filled squares in Figure 6).

Australia experienced knock-on benefits from that situation (until COVID-19 entered the global picture and put the brakes on a great deal economic activity around the world). For much of 2018 and all of 2019, it looks like China's need for Australian merchandise (to help fulfill the world's orders for China's manufactured goods) was a major contributor to Australia's exports to the world reaching well-above-average values — to levels not seen since about the end of 2012 (see pale purple dashed line in Figure 6). This recent scramble of China's for Australian stuff was perhaps encouraged by the floundering of the Australian dollar during that two-year period.

Should China's serious purchasing continue uninterrupted, it might generate a stiff enough rising thermal wind for the Australian dollar to lift in strength. [11]

Given that China will probably need to top up its iron ore stockpiles in the near future for industrial steel-making purposes, it's not surprising China has been trying to get a rise out of Australia and its other suppliers on the world stage lately. [12] Initiating diplomatic spats and mounting cyberaggression campaigns not only diverts the world's attention from the fact that the yuan has been looking curiously anemic ever since the tariff war began [13], but also it might be a tactical move to spook various markets in ways that keep the Australian dollar down. [14]

* 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.

References

[1] 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.

[2] E. Laschon (27 May 2020) "Coronavirus will send WA economy into a recession for 2020-21, Treasurer Ben Wyatt confirms", ABC News.

[3] N. Toscano (21 April 2020) "BHP flags 'sharp' drop in global demand as virus clouds commodities outlook", Sydney Morning Herald.

[4] A. Flaaen and J. Pierce (2019) "Disentangling the effects of the 2018-2019 tariffs on a globally connected US manufacturing sector", Finance and Economics Discussion Series, paper 2019-086, Board of Governors of the Federal Reserve System, 32 pages.

[5] C.P. Bown, M.A. Crowley, R. McCulloch and D.J. Nakajima (2005) "The US trade deficit: Made in China?", Economic Perspectives, Federal Reserve Bank of Chicago.

[6] See for example: E. Dela Cruz (17 May 2020) "China iron ore futures hit record peaks as supply concerns mount", Reuters.

[7] N. Hume (15 May 2020) "China demand pushes iron ore back above $90 a tonne", Financial Times.

[8] J. Carmody (27 May 2020) "Iron ore price surge set to boost WA budget amid Brazil coronavirus crisis and Chinese demand", ABC News.

[9] S. Lannin and S. Chalmer (20 May 2020) "ASX closes lower, mining stocks fall on worries China could target Australian iron ore", ABC News.

[10] E. Borrello (9 May 2020) "WA's decision to keep its mines open amid coronavirus may have saved Australia's economy", ABC News.

[11] G. Hutchens (2 June 2020) "Australian dollar surges on iron ore and economic optimism, even as recession looms", ABC News.

[12] S. Dziedzi (11 July 2020) "What's behind Australia's response to the Chinese government's crackdown on Hong Kong", ABC News.

[13] DW.com (26 August 2019) "China's yuan falls to lowest level in 11 years".

[14] D. Chau (1 June 2020) "Australian dollar surges past 68 US cents, ASX volatile on US-China tension", 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.