Insight - Australia’s commodity investment surges

Major player: A freight train transports coal in Gunnedah, New South Wales. Australia’s investment trends are relevant for the global commodity sector given the country’s position as the world’s largest exporter of iron ore and LNG, and it vies with Indonesia for the title of biggest coal exporter. — Bloomberg

FOR the first year in seven the value of commodity projects being undertaken in Australia increased, as the natural resources sector shrugged off the economic hit from the novel coronavirus pandemic.

Figures released yesterday by the government showed a 30% jump in what it terms “committed” resource and energy projects to A$39bil (US$28.5bil) in the 12 months to the end of October this year.

While liquefied natural gas (LNG) was still the commodity drawing the lion’s share of investment money, the report from the Department of Industry, Science, Energy and Resources also showed the growth areas were gold and metals associated with the transition to a lower carbon energy future.

Australia’s investment trends are relevant for the global commodity sector given the country’s position as the world’s largest exporter of iron ore and LNG, and it vies with Indonesia for the title of biggest coal exporter.

It is also the world’s third-biggest gold producer and largest net exporter of the precious metal, and also ranks fifth in world copper and cobalt output, has the second-largest reserves of copper, cobalt, bauxite, and is ranked third in reserves of lithium and rare earths.

The report defines “committed” projects as those where a final investment decision has been taken, and among those LNG represents some A$20bil, or just over half of the A$39bil total.

However, it’s worth noting that the LNG ventures are not greenfield, or new, projects, rather they are brownfield developments largely aimed at providing new sources of natural gas to existing LNG plants, in order to replace depleting fields.

There is still a pipeline of potential LNG investments that the report places in the “feasibility stage, ” with a total potential value of A$77bil-A$83bil.

However, much will depend on the market view for LNG in the coming years, with most industry analysts expecting the current surplus to be maintained as new supply from counties such as the United States, Russia, Canada and Mozambique outweighs rising demand, mainly in Asia and led by China.

Iron ore is the heavyweight of Australia’s commodity exports, so it’s not surprising that it also ranks second behind LNG in the value of committed projects at A$7.4bil, spread across four developments.

However, similar to LNG, much of the iron ore investment is aimed at maintaining current production levels by developing new mines to replace depleting reserves.

Gold shines

Where money is going to increase production is focused on gold, as well as minerals focused on the energy transition.

There are 15 gold ventures at the committed stage, with an investment value of A$4.3bil, a figure that exceeds the six coal projects with a value of A$3.4bil.

The report said these projects aim to increase Australia’s total gold output by 182 tonnes per annum, which if achieved would see the country overtake Russia to become the world’s second-largest gold producer, behind China.

In the category the report calls “other commodities, ” there was an increase to seven projects, from three in the prior year, with the value rising to A$1.7bil.

Among these projects are two lithium refineries, a rare earths processing facility and a manganese development.

There are also five nickel and cobalt projects at the committed stage, with an investment value of A$600mil.

While the investment dollars flowing into the major commodities like LNG and iron ore dwarf those going into the minor metals, it’s worth noting that this is where the growth in investment lies.

The value of investment in “other commodities” jumped by 107% in the year to end October from the prior 12 months, while those for nickel and cobalt rose 41%, and those for gold by 41%.

A broad interpretation of the report could be that the investment in LNG and iron ore is to sustain current production levels, but the investment in gold and the energy transition commodities is aimed at boosting output.

Another factor worth considering is that the report shows that investment flows haven’t dried up despite the coronavirus pandemic, that money is still available, suggesting confidence in future demand. — Reuters

Clyde Russell is a columnist for Reuters. The opinions expressed here are those of the author.

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