Australia is still suffering a hangover from the resources and commodities boom of the second half of the last decade and the first half of this one.
Investors remain cautious about wholehearted commitment to new or restarted developments. While there is a reasonable pipeline of projects, many of these – for example in Western Australia’s iron ore provinces and Queensland’s
Cape York bauxite deposits – involve replacement of existing assets that are approaching exhaustion.
According to the Australian Government’s Department of Industry, Innovation and Science (DIIS), the third quarter of 2017 was one of typical significant volatility in resource and energy commodity prices. Notably, prices for steelmaking raw materials and some of the base metals rose through most of the quarter, before suffering a sharp setback in the second half of September. As usual, the swings related largely to moves in market sentiment in relation to the Chinese economy.
“It appears that some resource commodity markets are, and will be in the next year at least, experiencing more intense seasonality. Chinese steel and aluminium makers stepped up their purchases of raw materials in the June-August period, as they prepared for the curtailment of a very significant part of Chinese production in the approaching winter,” Mark Cully, DIIS chief economist, wrote in the department’s Resources and Energy Quarterly.
Buoyant prices for steelmaking commodities and thermal coal, as well as increased LNG export volumes, are expected to see Australia’s resource and energy export earnings increase by 2% in 2017-18, to a record A$211B.
“For the first time in around seven years, industrial production is currently uniformly firm in the advanced economies, emerging economies, and in Africa and the Middle East. This has helped propel resource commodity prices higher,” stated Cully.
“Unfortunately, the high prices that have bolstered Australia’s resources and energy export earnings in 2016- 17 and (in early) 2017-18 are not expected to last. The combination of both slowing demand growth from China’s
steel sector and increased global supplies, are expected to lower export unit values in 2018-19.
“Overall, the value of Australia’s resource and energy exports is forecast to fall by around A$10B in 2018-19, to around A$201B.
“Australia’s resources and energy export values grew by more than 25% year-on-year in the September [third] quarter of 2017. The major driver of the rise related to developments in China – on both the supply and demand side
– through 2016-17, which lifted prices noticeably,” REQ observes.
China acted to restrict domestic coal output from the second quarter of 2016, to reduce loss making in the domestic coal industry. Beijing’s efforts were, arguably, too successful, and created shortages of coal – particularly the metallurgical variety – for the next several quarters. Chinese iron ore production was also weak in 2016, just as Chinese steel input demand staged a significant recovery in the latter half of 2016 and then into 2017.
Pros and cons
Australia was a major beneficiary of the ongoing shortages created in China by government-enforced cutbacks to domestic production, on both the volume and price sides. However, weather-related disruptions constrained growth
in the volume of Australia’s bulk exports in 2016-17, and producers are only just catching up now. Given Australia’s large presence in seaborne export markets, these weather disruptions contributed significantly to higher prices,
offsetting much of the impact of the volume loss.
Prices for iron ore and metallurgical and thermal coal are forecast to decline in the next two years, while LNG prices, which are linked to oil prices by formula under contractual arrangement, are forecast to edge up. A rise in Australian LNG export volumes is expected to partly offset the impact of weaker bulk commodity revenues.
The fall in prices will be more than offset by the impact of rising volumes during 2017-18, but will overwhelm the volume effect in 2018-19. Recent trends in exploration and capital expenditure in the Australian mining sector do not point to an extension of the resource production boom, currently forecast to peak in late in 2019, DIIS believes.
DIIS also warns that any untoward Australian dollar strength could exacerbate the impact of the expected decline in US dollar-denominated resource and energy prices over the forecast period.
The impact on exports of the weather-related disruptions has been downplayed to some extent, with Queensland coal ports turning in solid revenue and profit figures, despite the unwelcome and prolonged presence of Tropical Cyclone Debbie in March this year.
Queensland premier Annastacia Palaszczuk recently noted that the state’s exports had grown by A$21B year-onyear, with a significant driver being an increase in coal exports, especially hard coking coal, which rose by A$3.89B to A$9.53B, thanks mostly to higher prices.
North Queensland Bulk Ports Corporation (NQBP), which includes Weipa (bauxite), Abbot Point (coal), Mackay (sugar) and Hay Point (coal), achieved a solid operating performance in the 2016- 17 financial year, with a net profit after tax of A$22.1M, 20% up on 2015-16. Total tonnage was 170.5 Mt, down 4.3%, mainly thanks to storms. The four trading ports had strong trade growth earlier in the financial year, however, Cyclone Debbie, which hit the ports of Abbot Point, Mackay and Hay Point on 28 March, caused trade interruptions, serious flooding, and damage to rail lines and some terminal infrastructure. Throughput loss was put at approximately 11-12 Mt, but NQBP says that its customers are expected to make up this shortfall with additional shipments in 2017-18.
NQBP said it had been focusing, in particular, on building trade through Mackay, with investment in upgrades to port infrastructure and facilities.
Somewhat ironically, this had been successful in enabling the port to become a staging point for the upgrading of nearby Hay Point. In early August, Mackay welcomed the first of two new stacker reclaimers destined for BHP Billiton Mitsubishi Alliance’s Hay Point Coal Terminal operations.
BigLift’s HAPPY DOVER discharged eight components – the largest of which weighed 267t, while the longest was 65m – which were temporarily staged ashore, before being shifted in eight barge movements the 40 km south to Hay
Point. The whole process was repeated for the second stacker-reclaimer (total weight 1,150t) several weeks later.
Meanwhile, Gladstone Ports Corporation (GPC) was crowing that its namesake port had handled “an impressive” 120.4 Mt in FY 2016- 17, to surpass Hay Point as Queensland’s largest port by throughput.
GPC’s three ports – Bundaberg, Gladstone and Rockhampton – handled a record 121.2 Mt of cargo in the financial year, 4.5 Mt higher than in 2015-16. Gladstone clearly dominated, with coal trade reaching 69 Mt, aluminium trade volumes hitting 26 Mt, and LNG exports 19.4 Mt.
Leo Zussino, GPC chairman, said that, despite the detrimental impact on trade of ex-Tropical Cyclone Debbie, which caused port closures at both Rockhampton and Gladstone, and disruption to production at several coal mines, GPC had a very successful year. Total revenue for the year was A$470.9M, and earnings before interest and tax were A$134.8M.
Gladstone was identified by the Queensland Government as one of the four priority ports in the state, and it is the first to have a draft master plan prepared.
The proposed master plan is a long-term strategic outlook for the Port of Gladstone and surrounding land and marine areas, to ensure the port can continue to be developed in a sustainable manner, while ensuring key environmental
and social values are protected, and was developed by the government in consultation with GPC and Gladstone Regional Council. It covers growth from now until 2050.
“There have been concerns regarding the coal industry and its longevity,” said Peter O’Sullivan, CEO of GPC. “The International Energy Agency predicts that, even with the maximum uptake in renewables, world demand for both coking and thermal coal will increase. Currently 70% of coal from RG Tanna Coal Terminal is coking coal, and an increase in demand for steel in India, and the large number of High Efficiency Low Emissions power stations planned for Asia mean the long-term outlook for coal is still positive.
“Any downturn in coal or other product simply means a slower rate of development for the port, as, with a wonderful natural deep water harbour, the opportunities to attract other trades to the area over the next 30 years are very positive.”
As part of the diversification, in May 2016, GPC shipped the last coal through its Barney Point Terminal, and, in September this year, it completed a full remediation of the site, and plans to handle new products are being finalised.
O’Sullivan said that there were now very few signs of the terminal’s 49-year coal handling history. “Since closing the terminal, we have had the opportunity to perform maintenance works on the terminal infrastructure, which was not able to be performed during operation,” he said. “We made a commitment to the Barney Point community to remove coal from the terminal, and introduce clean bulk product. The terminal has the ability to load vessels quickly, and is designed to enable multiple new trade opportunities to be handled at Barney Point.”
It is anticipated that the first product, Calcite, will be placed at the terminal towards the end of the year. The Calcite will be relocated from Auckland Point. Other bulk products from the Mount Morgan and Monto areas are being investigated by GPC.
Still in Queensland, the multi-cargo port of Townsville has obtained clearance from the state’s coordinator-general for the Environmental Impact Statement (EIS) for the A$1.64B Townsville Port Expansion Project (TPEP).
Ranee Crosby, Port of Townsville CEO, said the 30-year development plan would ensure the port kept pace with global and domestic demands. “The state’s approval of the EIS for the project cannot be understated. It is a milestone that has been in the making for nearly 10 years,” she said. “By 2045, the Port of Townsville will create up to six new berths, new land for cargo handling, and will widen and deepen the channels for bigger ships. Having certainty that
the port can expand is a catalyst to attract and retain investment into our region.”
The A$193M Channel Capacity Upgrade will be the first work to start under the project, and may begin next year, pending Commonwealth approval of the Additional Environmental Impact Statement and finalisation of funding. The Queensland Government has already committed A$75M, and a decision by Canberra on matching funds is anticipated by the end of October.
This capital dredging will take 11.48M m3 of sediment from the port’s channels, and establish a 152- ha reclamation area. The TPEP will also see the construction of 4 km of rock revetments and, potentially, a new 700m western breakwater, in addition to the construction of six new berths.
In a transfer similar to that which took place at Mackay, at the end of September, Townsville handled the staging of a A$50M, 2,000t replacement stacker-reclaimer for Adani’s Abbot Point Coal Terminal.
The unit arrived in sections on United Heavy Lift’s PACIFIC WINTER, and was discharged to Townsville’s Berth 10.
The Port of Townsville constructed a purpose-built ro-ro facility at the end section of Berth 10 for the transfer of the cargo, which was moved in sections on barge by Pacific Marine Group to Abbot Point.
The construction of the Berth 10 ro-ro facility means the port can now facilitate the movement of huge pieces of project cargo into northern Australia, without having to engage the entire commercial section of the wharf, as a trade vessel can still use Berth 10 to load/unload cargo, while the ro-ro section can operate independently. Thus the port says it now has more capability to service new and expanding mine projects.
Near Weipa, on the Gulf of Carpentaria side of Cape York, Rio Tinto is progressing well with its A$2.6B Amrun bauxite project, which is expected to make its first export shipments in Q1 2019. Amrun, located about 40 km south of
Weipa, comprises a mine, processing plant and bauxite stockpiles, warehouses, a power station, and new barge, ferry and ship-loading facilities.
Initial production is slated at 22 Mtpa – 10 Mtpa of which will replace the current East Weipa working – with expansion options to 50 Mtpa. Another BigLift vessel, HAPPY STAR, arrived at Weipa in midAugust with three of seven jackets for construction of the Amrun export wharf. The jackets measure approximately 38m x 35m at the base, and are almost 31m high. They have been discharged and installed directly on to the seabed, utilising the two 900t capacity heavy lift cranes aboard HAPPY STAR.
In Western Australia (WA) the major iron ore producers, BHP, Rio Tinto and Fortescue, all turned in solid, if unspectacular, production figures for 2016-17, and even Gina Rinehart’s Roy Hill mine is now within reach of its nameplate
55 Mtpa capacity, 19 months after shipping its first ore. Most producers are revelling in strong profits, thanks to a combination of good prices and rigorous cost-cutting. The WA Government says state wide iron ore sales rose by
6% in FY 2016-17, to reach a record 790 Mt.
As usual, a good indicator of the health of the Australian iron ore industry is the throughput of Pilbara Ports Authority (PPA), encompassing Port Hedland (BHP, Fortescue and Roy Hill) and Dampier (Rio Tinto - although for reasons steeped in history, Dampier figures do not include Rio Tinto’s Cape Lambert facility, despite it coming under PPA’s marine administration).
PPA delivered a record annual throughput of 668.5 Mt for the 2016-17 financial year, an increase of 35 Mt, or 6%, from last year’s volume.
Port Hedland contributed a record 500.9 Mt, an increase of 40.5 Mt (9%) from the previous year, and, of this iron ore exports reached 494.6 Mt, an increase of 40.3 Mt (9%). Dampier slipped by a marginal 5.3 Mt (3%) from the previous year, but still reached 167.6 Mt.
Since the end of the financial year, PPA throughput has been steady. In July 2017 it dropped by an insignificant 3,000t to 52.9 Mt (Port Hedland at 38.7 Mt, down 1%, and Dampier at 14.2 Mt, up 2%). August showed a more noticeable fall of 478,000t to 57.9 Mt compared to August 2016 (Port Hedland at 43.5 Mt, down 25,000t, and Dampier at 14.4 Mt, down 3%). A recovery in September, however, saw it climb by 5% to 59.2 Mt (Port Hedland at 43.3 Mt, up 4%, and Dampier at 15.2 Mt, up 9%).
There remains some reluctance by major and minor producers to commit to new projects, other than those targeted at replacing existing production. One exception is the Balla Balla Infrastructure Group’s (BBIG) integrated iron ore development in the Pilbara, for which the WA Government last month introduced legislation ratifying a State Agreement struck earlier this year.
BBIG plans to construct a new export facility on the Pilbara coast, between Karratha and Port Hedland, with a 162 km railway linking it to iron ore deposits in the central Pilbara. The State Agreement provides tenure for the railway component of the project, and also sets out local industry participation, community development, and third-party access requirements.
A final investment decision for the project is expected next year. If approved, the project is expected to create 3,300 construction jobs and 910 operational positions.
On the other side of the country, commodities giant Glencore has had a major win in its long-running dispute with the private owners of the long-term lease of the Port of Newcastle – and, in the process, ushered in a new era of
uncertainty for infrastructure investors.
Glencore Coal Assets Australia (GCAA) has been warring with Port of Newcastle Operations (PNO) since the Hastings Funds Management/China Merchants joint venture imposed what the coal miner considered unreasonable price increases soon after the port lease was sold by the NSW Government for A$1.75B in April 2014.
Call for regulation
In May 2015, Glencore applied to have Newcastle’s shipping channel service (access fees and conditions) “declared” – i.e. subject to regulation by the Australian Competition and Consumer Commission (ACCC). However, in January 2016, the relevant federal minister decided not to declare the service.
Glencore then applied for a review of this decision by the Australian Competition Tribunal (ACT), and, in June 2016, the Tribunal agreed with Glencore, and declared the shipping channel service under Part IIIA of the Competition
and Consumer Act. The declared shipping channel service is defined as “the provision of the right of access and use of the shipping channel (including berths next to walls as part of the channel) at the port, by virtue of which vessels may enter the port precinct, and load and unload at relevant terminals located within the port precinct, and then depart the port precinct”.
PNO subsequently applied to the full Federal Court for a judicial review of the Tribunal’s decision.
Meanwhile, as per the ACT’s decision, late last year, the ACCC was formally notified of the access dispute between GCAA and PNO in relation to the shipping channel service at the port, with Glencore requesting that the ACCC arbitrate – which it can only do if the contested services have been declared. The Commission then had 180 days from dispute notification to make a final determination – but, should PNO’s challenge be successful, the arbitration would cease.
“ACCC arbitration would seek to identify a solution that balances the interests of both parties, and promotes the economically efficient use and operation of these services,” ACCC chairman Rod Sims said at the time.
In mid-August 2017 the Full Federal Court unanimously rejected PNO’s appeal and upheld the ACT’s declaration of the channel services.
“Since its privatisation, the Port of Newcastle has revalued its assets and increased shipping fees by in excess of 60% without any change in the nature or quality of service provided,” said Glencore, welcoming the decision. “The
introduction of a reasonable regulatory constraint is critical for all users of monopoly owned infrastructure.”
PNO, however, warned of new layers of “costly regulation”.
Geoff Crowe, CEO of PNO, said: “This is a disappointing outcome, not just for Port of Newcastle, but potentially for many other major infrastructure providers across Australia. It could have wide-ranging implications for the profitability and value of nationally significant assets.”
The company said it would review and assess the implications of the decision, and would continue to engage proactively with its customers and the ACCC.
"Port of Newcastle has a commercial imperative to maximise trade volumes through the port, and to ensure continued access for customers. Its business depends on its customers’ success.
“Port of Newcastle pricing remains competitive with other Australian ports,” PNO said, having pointed out (again) that, in the 20 years prior to privatisation, the Port of Newcastle’s port usage charge for coal ships increased by just 1.2% (during the same period, the CPI inflation index rose 70%), and that the new owners had removed what was, in effect, a subsidy, and instead aligned the port usage charge with those of competitors such as Port Kembla.
Analysts said the Federal Court ruling would cause “fear and trepidation” amongst investors who had pumped billions into the privatisation of state-owned assets in recent years. However, port users applauded the added protection against the “replacement of public monopolies with greedier private monopolies”