By Matt Judkins
IT’S NO secret that Western Australia’s resources sector is in a state of transition. The period of expanding production capacity and associated record high construction activity is drawing to a close – just as global commodity prices weaken.
This shift to an operational phase, with the proceeds and royalties from multi-billion dollar capital investments finally delivered to the state’s economy will, perhaps surprisingly, accompany a softening of the state’s economic growth in the short to medium term. On the upside however, a sector in transition also presents a number of opportunities that, if approached and executed in the right way, can reduce uncertainty and support longer term growth.
Deloitte Access Economics’ most recent Quarterly Economic Brief, produced for the WA Chamber of Minerals and Energy, included a 2014-2015 growth forecast for the State of 2.7 per cent, followed by a pick-up in activity from 2015-2016, and a forecast peak in growth at 4.4% in 2016-2017.
This does, however, represent a downgrade of the previous 2016-2017 growth forecast of 5.9%, due to a sharper than expected contraction in commercial construction activity, particularly important to Western Australia, and which includes resources sector related engineering construction.
Growth has slowed of late (but not dramatically), and the downward revisions to our forecasts have been based largely on adjustments in the timing of the slowing in commercial construction activity, offset by the pick-up in resources production, and the recovery of other sectors of the economy. Ultimately, small changes in these timings have a big impact on WA’s headline economic growth numbers.
Amidst these shifts in activity and numbers, the state also continues to face a number of risks, primarily around volatility in commodity prices and China’s growth path.
While a significant trading partner – currently accounting for 55% of WA exports – China’s transition from export-led to consumption-led growth is a risk to watch as the country’s economic growth continues to weaken. That said, we remain of the view that the state will continue to be a major beneficiary of the rise of emerging Asia once the current transition period passes.
The widely reported decline in global commodity prices, particularly for iron ore and, more recently, the rapid decline in the oil price is having a dramatic impact on the fortunes of many operating miners and those development projects yet to reach final investment decision. The iron ore price is responding to increased export capacity out of the major iron ore miners coupled with a slowdown in China’s investment driven growth. This is in contrast to the sharp drop in the price of oil over the past six weeks, which reflects global geopolitics at its most raw.
However in the current environment of weaker commodity prices – and a sharply lower Australian dollar – the opportunity for renewed focus on strategies to export the state’s expertise and capabilities in the resources sector to emerging and established resources provinces overseas is very compelling.
Underpinning these opportunities is the expectation WA will, despite the current transition, retain a large resources sector workforce in the long term. The sector has been the biggest job creating industry over the past five years. WA saw employment growth of 150,000 jobs between 2009 and 2014, with the resources sector accounting for 30% of this. At its peak, in August 2012, WA’s resources sector employed 122,500 persons. Although the workforce shrank in 2014 (to 95,500 employees), and the sector expects to continue to shed labour in net terms through to 2025, employers are not foreseeing a significant decrease in employment to pre-expansion levels. The sector’s workforce is projected to decline modestly to 87,000 by 2025 according to CME’s 2015-2025 Resources Outlook, meaning most of the employment gains realised in the last five years will be largely preserved. This will set a sound platform for the state to develop and export skills, knowledge and innovation in minerals and oil and gas extraction.
WA now has significant capability across the project lifecycle – from exploration and surveying technology to project management and development and extraction techniques. This has real potential as a future growth industry, focused on the export of skills alongside the resources themselves – from the establishment of centres of excellence, research and training centres, specialist courses and other media to train, educate and develop the human capital and capability of the resources sector globally.
Technology and the shift to natural gas
WA also has an opportunity to establish itself as a technology leader in the utilisation of natural gas to power industrial activity. CME’s Outlook signals a change in the energy mix within the resources sector over the medium term – from diesel to natural gas. Consumption of gas as a proportion of the total energy mix in the resources sector is projected to rise to over 50% by 2020, driven by use in both onsite electricity generation and mobile plant. While WA has utilised gas-fired electricity generation for a number of years, facilitating the gas uptake in mobile plant creates a new opportunity for the state as a leader in related technologies.