China's success over the past two years transitioning its growth driver from pure construction to a more consumption-based, "middle economy" and its need for higher-quality iron ore is paving the way for continued positivity this year for Australia's miners, Deloitte experts said.
While the enormous Chinese appetite for minerals such as iron ore and coal has been a boon to Australia, which in 2017 set a record for the longest period of expansion without a recession by any developed economy, recent moves by Beijing to steer toward a more sustainable growth model raised the prospect of less dependence on the industries that have fueled this demand.
Deloitte Access Economics Western Australia leader Matt Judkins told a Feb. 7 media roundtable in Perth that exploration had picked up across several commodities, particularly for gold given the strong performance of the Australian-dollar gold price of late, and in booming technology metals such as lithium.
He also noted a persistent "level of conservatism" around exploration in Australia and uncertainty over commodity pricing risks, particularly in iron ore and said it remained to be seen how many of a plethora of lithium projects would make it to production.
The marginal cost of production for iron ore is also probably below the current production cost, he said. Yet, when considering one of the commodity price's key drivers — China — Judkins saw the outlook for Australian exploration as stable.
While China's economy has tapered since its breakneck growth in the last decade that led to Western Australia's mining boom, the Asian giant has gone through another, more nuanced transition of late, and the outcome is positive for Australian mining, Judkins believes.
"The transition China has gone through over the last couple of years has been pretty good," Judkins said.
"Where they were heading — just building a lot of construction activity — was clearly unsustainable, and that was probably the risk that we saw: that you [may] have a hard landing because you're going too hard in a particular direction."
"What they have managed to do quite well is manage the transition of that growth driver from the building and construction — the industrial side — to a broader-based growth, [which means] consumption, and ultimately the generation of a 'middle economy', which some of the developing nations have failed to do."
"The proof is in the pudding, but so far they seem to be doing that transition reasonably well."
While China's economy will continue to slow, it will be off of a much larger base, supporting consumption and pricing.
"The risk for the Australian economy and to many of our mining clients is a slowdown in China, but we don't forecast that as being likely," Judkins said.
Also bolstering the outlook for Australia's miners is China's need for high-quality iron ore that steel mills need to reduce their emissions and lift efficiency and output to compensate for those closed in a crackdown on pollution.
China's drive for cleaner air is also fueling demand for higher-quality coal, Deloitte Consulting mining leader David Cormack told the roundtable.
"[Chinese steel producers] will always be prepared to pay a premium for the higher quality iron ore, whether that's coming from South America or Australia," Cormack said.
"You've seen Chinese investment in some magnetite projects in Western Australia and elsewhere in Australia. Magnetite is a good substitute that they can blend in and get that higher quality."
A "social awareness" has evolved of late in China for steel producers to better understand the quality of their raw materials to improve their metal and what that meant for their own processing and manufacturing, Cormack said.
