The European Union (EU) has declared its interest in Australian critical minerals, joining a list of international suitors that includes the US, South Korea and India.
As the year unfolds and the world learns how to live with COVID, BHP chief executive officer Mike Henry examined opportunities for the resources industry in the face of ever-changing global events.
Mike Henry provided a clear-eyed assessment of the state of resources sector at the Australian Financial Review Business Summit in March.
“People are trying to make sense of what’s going on in the world around us,” the BHP chief executive officer told the audience.
“People realise that we’re potentially at quite a defining point in history, and they’re needing to make big choices or some are trying to keep their head above water.”
That uncertainty, according to Henry, can be viewed in a positive light by the industry and even entire nations.
“Others see this as an opportunity to make choices about how they shape their companies,” he said. “That’s certainly the attitude that we’ve adopted that sits behind some of the moves that we’ve made.
“Same thing applies for the nation. Choices we make as a nation as to how we shape the economy for the decades to come are going to be quite critical.”
When Henry spoke with Chanticleer columnist James Thomson on March 8, Russia’s invasion of Ukraine had entered its 12th day and sent shockwaves through the global commodities market.
As countries and jurisdictions banded together to impose sanctions on Russia, the ripple effect on commodities was stark, with the likes of nickel, copper and coal all reaching record high prices.
“You look at liquefied natural gas (LNG), for example,” Henry said. “A couple of years ago, it was sitting at $US2 per million British thermal units (BTU). Earlier today, it was sitting at $US84.
“We’ve seen hundreds of per cent price increases for a range of commodities, which is going to have spill-over effects on inflation, potentially on global growth – we’re forecasting possibly a 0.5 per cent lower global growth over the course of the next year than we were previously anticipating.
“And that’s a combination of the impacts of Russia–Ukraine, but also China coming up with a slightly more positive or aggressive growth target than some were anticipating.”
In the face of increasingly severe weather events in Australia – the latest of which was devastating floods in Queensland and New South Wales – and with pandemic and COVID-related labour constraints in the background, the market was already unstable.
Adding geopolitical crises and the most significant military action in Europe since World War II means companies are now being tested on a new level.
According to Henry, businesses that can wisely manage cost pressures will be best placed amid the uncertainty.
“Markets overall were more volatile heading into the Russia–Ukraine conflict, certainly on the supply side of things,” he said.
“We’re seeing exacerbated supply-side shocks, be it from conflict; we’ve had weather challenges here in Australia, particularly on the east coast; COVID (has had an impact), of course, which continues to disrupt supply chains and supply of some commodities.
“All of these are leading to greater volatility and the key is how companies position themselves to contain inflation, so that’s been a big area of focus for us – ensuring that costs don’t run away from us.
“But also ensuring that you have greater leverage in those commodities that do have that upside skewing as the world navigates some of the challenges that lie ahead.”
While Australia’s present day resources sector remains dominated by what could be called “traditional” resources – coal, gold, iron ore, etc – a changing industry landscape is paving the way for mining’s new frontier.
So-called ‘future-facing commodities’ such as copper, nickel and potash will grow in importance as the world moves towards renewable energy and into new areas of mining.
“To frame it up, the world’s going to need probably about two times as much copper over the next 30 years, 34 times as much nickel, even two times as much steel to support the energy transition,” Henry said.
Those needs, however, do not necessarily spell the end of Australia’s traditional resources.
“Two times as much steel means more iron ore and more coking coal,” Henry said. “There’s a huge opportunity for Australia in that.
“As the world seeks to meet that need for more commodities, it’s going to be doing so with resources that tend to be smaller, deeper, more complex, lower grade.
“And so the implication of that is that for two times more copper, you’re actually going to need more than two times as much mining.”
While Australia has considerable reserves of future-facing commodities that can be mined in the future, Henry said considerable work would be required to take advantage of those resources.
“Capitalising on this opportunity is going to be nowhere near as easy as it was to capitalise on the opportunity in iron ore and coal,” he said.
“Not that that was easy, but we had both geographic and geological advantages in iron ore and coal.
“We were closest to big markets. We had deposits that were relatively close to surface and close to tidewater. That’s not the case in copper, nickel and some of the other metals.
“We’ve got less of an advantage over other nations in those metals, so we’re going to have to work two or three times as hard to unlock this opportunity, which comes back to skills, innovation, productivity.
“All of these are going to have to be areas of focus if we’re to continue on this great trend … of the resources sector contributing to the prosperity that we’ve seen in Australia over the past four or five decades.”
BHP, for its part, has a number of new commodities in the pipeline with various operations in Australia.
“You’ll find examples like that, but I don’t think we should start from the perspective that all processing should happen onshore here,” Henry said. “There’ll be times when there’s better returns for that processing to occur overseas.
“But the more Australian is able to do to put the settings in place, that makes it possible to invest economically in processing here because it helps to diversify the economy.”
Globally speaking, it’s no secret Australia has fared better than many countries over the past two-plus years, and the resources industry has been a huge driver of that sustained value.
While Henry is aware of the importance today’s resource sector has played in that strong pandemic response, he is also cognisant of the fact untapped opportunities remain.
“The resources sector remains very important, (but there’s) still lots of opportunity to be pursued there,” he said. “If you look at the future for Australia on a multi-decade horizon, it is going to be important that we’re investing in developing new businesses, new sectors.
“And given that we’re such an export-oriented trading nation, we’re going to have to have the ability to access expert markets.
“But we will all need to lean into supporting small- to medium-sized businesses develop new products, new services that can be be leveraged here in Australia, but also overseas.”
This feature appeared in the April issue of Australian Resources & Investment.
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