THE NEW MINING SUPER-CYCLE: WHAT DOES THE EVIDENCE SAY?

By Rebecca Todesco, Assistant Editor, Mining Magazine

The past few years have seen a sharp increase in investment in mining and energy production projects as countries across the world scramble to meet emission reduction targets, with lithium emerging as a key standout among ‘green’ commodities receiving capital. Despite this, recent research by the Commonwealth Bank Australia (CBA) has put to rest the rumours prematurely labelling this as evidence of an imminent mining boom.

The year leading to October 2022 saw the value of committed mining and energy projects in Australia spike 54 per cent to AU$83 billion, leading many to claim the country is on the brink of a new mining super-cycle.

The reasoning behind these claims can be attributed largely to the energy transition from fossil fuels to renewable alternatives.

Even though there is undoubtedly a shift to greener investments, Commonwealth Bank’s lead mining and energy commodities strategist, Vivek Dhar, said that claims Australia is on the verge of another mining boom are “premature”.

“The evidence does not yet point to the start of a ‘green’ mining super-cycle whereby significant investment is taking place in the commodities needed in the energy transition,” Mr Dhar said.

Forecasts to 2030 predict that demand for the commodities needed to meet decarbonisation goals – such as nickel, copper, lithium, cobalt and graphite –will soar. A common characteristic shared by these commodities is that they’re all linked to efforts to restrict the increase of global temperatures to 1.5°C.

Although the increase in the value of committed mining and energy products does show promise, the CBA has dispelled rumours of an impending ‘green mining’ boom, with research showing that despite the growth in green investments, gas and coal projects continue to attract and secure the majority of funding, approximately 64 per cent.

The CBA research also explores opportunities in Australian lithium, both currently and in the future, as well as the possibilities hydrogen presents, and where downstream processes could lead to in Australia.

Key characteristics of previous super-cycles

The CBA findings list and explore three commodity super-cycles that have occurred since 1900:

♦ American industrialisation and urbanisation, lasting between 1903 and 1932

♦ Post-war European and Japanese reconstruction, from 1965 to 1996

♦ Chinese industrialisation and urbanisation, spanning 1996 to 2016

Something these three super-cycles have in common is that they were driven by a demand surge stemming from urbanisation and industrialisation; each of the super-cycles was spurred by demand, and supply tried to match the demand throughout.

Analysis of previous mining commodity super-cycles illuminate some characteristics they share, including that they typically last between 20 and 40 years.

During the most recent super-cycle, Australia experienced a peak in mining and energy investment in 2012, the cause of which the CBA findings attribute to China’s stimulus response to the Global Financial Crisis in 2007–08.

This peak in Australia’s committed project pipelines was triggered by a spike in LNG projects in Australia to service growing gas needs in Asia – particularly Japan, China and South Korea.

This 2012 peak took place towards the end of the last super-cycle, which saw China emerge as an economic and industrial powerhouse.

According to S&P GSCI figures, the price peak in the China-led commodity super-cycle occurred in 2008, with a smaller peak in prices also occurring in 2011, likely due to China’s stimulus following the Global Financial Crisis.

A different kind of super-cycle

Analysis of the figures and investment trends seem to point to the green supercycle deviating from the characteristics of previous cycles.

Where the other cycles were driven by urbanisation and industrialisation, the CBA points to demand in the anticipated green super-cycle being pushed by decarbonisation instead.

The CBA findings also acknowledge that some commodities will not take part in the ‘green’ super-cycle.

While the prices for minerals and materials critical to decarbonising the global economy are expected to lift materially due to additional demand, the demand for fossil fuels is expected to plummet in the same timeframe. However, a downturn in fossil fuel prices caused by a weaker demand for fossil fuels will not be instantaneous and may take years to come into full effect.

Even before the Russia-Ukraine war caused a reduction in fossil fuel exports from Russia, decarbonisation goals by companies and governments alike were driving a reduction in investment in fossil fuel supply.

Shareholder advocacy has also had a role to play in the decline of fossil fuel investment.

The lithium opportunity

Of the committed projects in Australia, Mr Dhar said it is important to highlight lithium, which accounted for around six per cent of the value of committed projects in the year in question.

In spite of this relatively small figure, Mr Dhar said “Australia will have a key role in supplying lithium to the global market in coming years”.

Additionally, Australia accounted for 50 to 55 per cent of global lithium output in 2021.

Lithium is an essential component in batteries for the decarbonisation of the transport and power sectors. Out of the metals needed in the energy transition that are gathering investment dollars, lithium shows the most promise.

Hydrogen potential

“Hydrogen projects account for 40 per cent and 60 per cent of the value of feasible and publicly announced projects respectively,” Mr Dhar said.

Additionally, two hydrogen megaprojects account for more than 50 per cent of the value of hydrogen projects at these stages.

Despite the uptick in hydrogen projects over recent years – including the Lake Lynell pumped hydro project and the Central West Pumped Hydro Project – government support is still needed to boost the supply and demand of hydrogen in Australia. As a result of this, excluding hydrogen, the outlook for project investment in coming years is somewhat gloomy.

“If Australia is going to recreate the mining boom from the China-led supercycle sometime this decade, it will need to become a major hydrogen exporter,” Mr Dhar said.

Of the Australian mining and energy projects that reached the committed stage in 2022, coal, iron ore and gas accounted for 77 per cent of committed investment. The prevalence of these more traditional commodities – and in particular coal and gas – further banishes rumours of a green mining boom as these are not the commodities one would expect to lead in a ‘green’ super-cycle.

Additionally, with a number of financial institutions and economies limiting financing for fossil fuel projects, capital to build additional coal mine capacity has been in short supply.

Downstream processing growth

Downstream processes continue to be challenged in Australia, with upstream projects commanding most of the project pipelines, regardless of what stage of development the project is at.

Rising energy prices and high labour costs reduce Australia’s chances of becoming a major player in downstream industries with extraction, rather than processing and elaborate manufacturing, being the nation’s upper hand.

Future compliance standards and stringent regulations could present challenges for downstream processing facilities that emit or plan to emit more than 100,000t of CO² annually, with stricter emission intensity levels predicted from 1 July 2023.

Even with these challenges, investment to produce lithium hydroxide shows that there is still scope for downstream industries to evolve in Australia, with major lithium hydroxide projects like Kathleen Valley and Kemerton contributing to this.

Additionally, the energy losses resulting from moving hydrogen – particularly via ship – clear the way for more downstream processing to be located locally.

However, changes in global policy could present a further challenge for Australia’s downstream processing potential, including the US Inflation Reduction Act (IRA) which incentivises the onshoring of supply chains needed in the energy transition through allocating tax credits.

With Europe also offering incentives to boost onshore processing and pushing for self-reliance, Mr Dhar said Australia needs to implement something similar to grow onshore downstream processing.

“State and federal governments would need to provide support policies in line with or in excess of governments in Europe and the US for Australia to develop significant downstream processing,” Mr Dhar said.

The CBA findings highlight lithium hydroxide and other chemicals needed for the battery sector as the most likely to rapidly multiply, thus the most likely path for Australia’s downstream sector growth.

“The most likely trajectory for Australia is growth in select downstream sectors,” Mr Dhar said.

The findings also indicate that although competing to gain market share further downstream in the energy transition may look too difficult, factors including current government policy settings, and the high costs facing existing downstream facilities could be key drivers

Even with all this predicted growth, the CBA results note that decarbonising existing downstream facilities will likely be a key focal point for Australia’s downstream sectors moving forward.

The last few years have indeed seen a shift towards ‘greener’ investments which has prompted claims that Australia is on the brink of a new mining super-cycle. However, evidence suggests that such claims are too hasty, with coal and oil projects still securing more than half of investment funding.

In embracing key ‘green’ opportunities, such as becoming a major lithium and hydrogen producer for international and domestic markets, and building onshore downstream processes, Australia can continue on its energy transition path towards its net zero goals.