Mining Industry Report

This report provides an in-depth analysis of the mining industry in Australia, with a focus on BHP Billiton and the iron ore market. It discusses the market structure, demand and supply determinants, price elasticity of demand, recent events, and the impact of the industry on the economy and employment. The report also highlights the key minerals available in Australia and their contribution to the export sector.

Running head: ECONOMICS FOR BUSINESS
Mining Industry Report
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1ECONOMICS FOR BUSINESS
Table of Contents
Introduction...................................................................................................................2
BHP Billiton – Australian Mining Giant.........................................................................2
Background of mining industry in Australia..................................................................3
Market structure of iron ore industry.............................................................................6
Demand and supply determinants................................................................................8
Price elasticity of demand.............................................................................................9
Recent event affecting iron ore industry.....................................................................10
Conclusion..................................................................................................................11
References.................................................................................................................13

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Introduction
The key industries in Australia are financial, business consulting, mining,
energy and healthcare. In this report discussion on mining industries are made.
Mining industry being one of the key industries in Australia, make substantial impact
on the economy. Almost all the areas in Australia in are involved in activities related
to mining. It is evident from the data that nearly 0.1 percent area in Australia are
temporarily being distributed for mining activities and 0.7 percent of land mass in
Australia is under mining lease (Minerals.org.au 2019). Moreover, mining industry
directly influences 0.02 percent of Australian lands. Australia is rich in different types
of minerals. The minerals those are available in Australia in abundant are copper,
gold, nickel, aluminium, diamond, zinc, silver, natural gas, petroleum, uranium and
coal. The objective of the report to discuss the market of and present scenario of
mining industry in Australia with special reference to BHP Billiton a company
engaged in mining of different minerals namely copper, nickel, petroleum, uranium,
natural gas, nickel, coal and iron ore. In this report, focus is given to iron ore industry
with discussion on its supply and demand analysis. Further, the market structure of
iron ore, its determinant of demand and supply and demand elasticity is discussed in
the report along with analysis of an event that has impacted the industry significantly.
The report therefore provides the impression of iron ore market in Australian mining
industry.
BHP Billiton – Australian Mining Giant
BHP Billiton is a mining company in Australia founded in 1885. During
foundation years it was knows as Broken Hill Proprietary Limited and it acquired its
current name after its merger with Billiton plc in 1860. The company is engaged in
mining of coal, petroleum, copper, nickel, natural gas, iron ore and Uranium. The iron
ore is the key mining product of the company and is one of the largest producer of
iron ore in Australia. On ASX BHP Billiton is the second largest company in Australia
after Common Wealth Bank of Australia in terms of market capitalization (IG 2019). It
employs over 62000 workers. In 2017, it produced 238 million tonnes of iron ore
(BHP 2018). It generated a total revenue of $43.638 billion in 2018 as compared to
$36.135 billion dollar in 2017.
Background of mining industry in Australia
As a key industry in Australia, mining industry supports the economy
significantly and functions as a base of the Australian economy. It is evident from the
data provided Australian Bureau of Statistics that in the past ten years the mining
industry has grown at an average rate of 6.5 percent annually. In 2017, the gross
value added in mining industry is equivalent to 7.4 percent of the gross value added
in the economy in Australia, is just after the financial and construction industry
(www.statista.com 2019). About 9 percent of Australian economy is contributed by
the mining industry. Products of mining industry in Australia have large demand in
the global market. As a result, the, the mining industry exports huge amount of
products that made it the largest earner for Australia in the export sector. In the
export market of commodities, mining industry contributes around 64 percent of the
total commodity exports and contributes around 50 percent of the total exports of
Australia. In 2018, the amount of iron ore that Australia exported was valued at US
$46.7 billion, which is 49.9 percent of the total iron ore exports in the world (World's
Top Exports 2019). This made Australia the leading iron ore exporter of the world.

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Figure 1: Contribution of mining industry to export and employment
(Source: Static.treasury.gov.au 2018)
Apart from the contribution to the economy in Australia, the mining is
considered significant to the country because of its contribution in employment of the
nation. Mining industry employs over 200,000 workers in Australia and this made the
industry one of the largest t employer of the country (Mining Technology 2019). The
employment in mining is wide spread, almost in every region people in Australia
some people are engaged in mining works. More the investment in resource sector
more will be the benefits for the employees. Thus, an increase in investment and
growths in capital stock have generated an induced effect on the earning of the
employees. As a result, the weekly average wage of the workers grew by 66 percent.
Figure 2: Monthly growth percentage of mining and ASX 200
(Source: Pwc.com.au 2018)

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Despite the recent decline in mining industry in the first quarter of 2015, the
recovery made by the industry is appreciable. From the beginning of the second
quarter of 2015, a laudable amount of growth has been noticed for ASX200.
Conversely, the market growth rate above 60 percent has benefitted the investors of
mid-level mining sectors. These investors earned significant amount of return due to
the current market growth. The major contribution made to this growth of the mining
industry has come from the companies involved in mining of coal, iron ore and gold.
The gold mining market shares 41 percent of the revenue generated by the mining
industry in Australia. However, in 2017 the iron ore mining industry experienced the
largest growth in revenue. In 2017, the mining industry generated $1.6 billion of net
profit (CFMEU Mining and Energy, 2018). Considering, the performance of the mid-
level mining companies in the past five years it has been observed that the profit
made by the companies collectively is the highest this year.
Market structure of iron ore industry
In most of the cases, limited number of producers serves the market of
resources. The number is so limited that in exclusive resource market the number
significant producers are quite low. Given the theory of economics, it can be
understood that this gives rise to oligopoly market structure in the supply side
(Fudenberg and Tirole 2013). This enables the producers to select the level of output
of their choice and the level of output does not follow the market demand curve.
Being a part of the resource market, the market for iron ore follows the suit. Thus,
iron ore market is also feature an oligopoly market. The iron ore market is highly cost
intensive and thus entering into iron ore industry demands huge capital investment
(Manova, Wei and Zhang 2015). This resulted in oligopoly structure of the iron ore
market. The constraint that investors face in iron ore industry is of capital cost. To
establish an iron ore mine with capacity of extraction over millions of tonnes the
investor needs to accrue minimum $1 billion cost generated from the waste
produced during extraction of the ore. Hence, for small companies it is nearly
impossible to run the entire process by absorbing such huge amount of cost.
Occurrence in any market failure affects the small companies with significant shock
and hinders the desirable flow of capital and in such situations; the companies will go
bankrupt and had to leave the market (Weeden and Grusky 2014). The risk of capital
loss and capital constraint restricts the small companies to enter the market (Moll
2014). Hence, the oligopoly market structure enables the big companies to dominate
the iron ore market.
Rio Tinto, BHP Billiton and Fortescue Metals Group are the top three iron ore
mining companies in Australia (Mining.com 2017). These three companies dominate
the iron ore market in Australia by sharing most of the market volume of iron ore
industry. These companies are capital rich and highly innovative. They hugely invest
in technology development and boost their production along with reduction in
production cost (Pindyck and Rubinfeld 2014). Hence, these companies are the
highly sustainable and productive that provides them the control over the market.

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Figure 2: BHP Billion’s income shares from different mining business
(Source: bhp.com 2018)
BHP Billiton is engaged in mining of coal, natural gas, petroleum, iron ore, nickel and
uranium. Among all these, iron ore generates the highest income for BHP Billiton.
Consequently, the company put maximum emphasis on the iron ore sector.
Fortescue Metals Group and Rio Tinto the major players other than BHP Billiton are
also focused on improving their productivity such that they can increase their
production of iron ore to be in the competition strongly.
Figure 4: Iron
ore
production of big three companies in Australia
(Source: transtainer.com.au 2018)
Demand and supply determinants
The price of iron ore is determined by the factors of demand and supply
present in the market. The steel industry in Australia and global demand are the key
determinants of demand for iron ore.

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Domestic steel industry demand: Infrastructure is an important contributor of
development of country. Developing infrastructure requires uninterrupted supply of
resources. One of the key material for infrastructural development is steel. Thus,
Australian steel industry assures continuous supply of steel for development of
infrastructure and construction (Yellishetty and Mud 2014). Primary source of steel is
iron ore and thus steel industry give rise to enormous demand for iron ores that
contributes to the market expansion of big iron ore companies.
Export demand: It is already discussed in the previous sections that mining export
shares a large amount of Australia’s export. Hence, export demand for mining
products is quite high in Australia. Among all the nations, the demand generated by
China for Australian mining products is the highest and is the largest iron ore
exporter from Australia. China being one of the most fast growing economies invests
hugely in construction and infrastructure development and thus creates considerably
high demand for Australian iron ore. The iron ore exports shares around 16.8
percent of Australian exports (Austrade 2017). The increased demand for Australian
iron ore has been generated by the emerging economies that invest highly in
construction and infrastructure. As BHP Billiton is among the leading company of
iron ore market in Australia, it benefits substantially from the increased demand in
the export market.
The two determinants of supply for iron are cost of production and own price.
Price: Own price of a commodity plays vital role in determining its supply. From the
economic theory of supply, it is know that price and supply shares a positive
relationship. The price of iron ore increases with increased demand in both the
export and domestic market. Hence, higher the demand higher will be the price
(Varian 2014). Profitability of companies increase when price of product increases.
Perceiving the scope of profit margin, companies invest more and thereby supply of
iron ore increases.
Production cost: Production cost is the primary driver of supply for a good. The rise
or fall in production cost contributes in determining the level of output to be
produced. Lower the cost of production more is the profit generated from a good,
assuming the price of the product is constant. Thus, BHP Billiton invested to
construct state of the art infrastructure such that it can minimize its cost and increase
supply. In a recent announcement, BHP Billiton shared that it would undertake
Harbour Debottlenecking Project to maintain the stability of supply of iron ore in
world and domestic market.
Price elasticity of demand
The change in demand of a product due to change in price of the product
gives the measure of price elasticity of demand for the product (Thimmapuram and
Kim 2013). The construction and infrastructure development sector generates
demand for steel, which in turn creates the demand for iron ore. Iron ore is the only
source of steel and thus iron ore has no close substitute. The price elasticity of iron
ore therefore is low. From a world market estimation, the price elasticity of iron ore
has been found as 0.24. The value shows that 1-unit price increase in iron ore
reduces its demand by 0.24 units. Thus, it is evident that demand of iron ore is
relatively inelastic and implication of this is that supply will drive the adjustment in the
market initially. Producers with high cost will be replaced by the producers with low
cost. Demand inelasticity will lead to fall in price and thereby revenue declines. The

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suitable example of this is the mining industry in China. Even though the iron ore
export in China has increased there is steep 31 percent fall in export earnings due to
fall in price of iron ore.
Recent event affecting iron ore industry
The main driving factor for Australian mining industry is the demand of iron
ore generated by China. For developing and emerging economies, iron is one of the
basic resource of production and infrastructure development. The rapid urbanization
and growth in manufacturing sector of China has resulted in creation of huge raw
material demand especially iron ore. This has made China the largest iron ore
consumer in the world. However, the economic boom that was occurring in China for
the last 20 years has now been declining. According to BHP Billiton, China solely
was responsible for the entire growth of iron ore production in the last one and a half
decade but owing to decline in production of steel in China the demand for Australian
iron ore has declined.
The iron ore industry in Australia is being affected by the slowing economic growth of
China. The demand for iron ore has declined substantially and the market is flooded
with excess supply of iron. As a result, the price of iron ore has declined. The
mechanism is explained in figure 5 given below.
Figure 5: Effect of China’s slowdown on iron ore market of China
Source: (Created by the Author)
In the figure, SS and DD depict the supply and demand for iron ore. At point E
equilibrium of the industry occurs. Point P* and Q* gives the equilibrium price and
quantity respectively. The demand curve shift left ward to D1D1 as industry contracts

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due to decline in China’s economic growth and fall in demand for iron ore. Following
the decline in demand the quantity and price contracted to Q1 and P1 respectively
and a new equilibrium occurred at E1.
Conclusion
The above discussion on mining industry in Australia leads to the conclusion
that mining industry is one of the important industry in the country contributing a
major portion in GDP. It is also one of the largest employer in Australia. The mid-
level mining companies beats other companies of the country in ASX 200 in growth
terms. BHP Billiton is one of the largest mining company in Australia, and apart from
other mining products, it also produces iron ore. It is considered as the largest
producer of iron ore in Australia. The mining industry operates in an oligopoly market
structure. There are entry barriers to the industry in the form of capital constraint.
The industry is dominated by three large firms. The determinants of the demand of
the iron ore are the export demand and domestic demand generated by the steel
producers. The determinants of supply are price of iron ore and its production cost.
Steel is the one of the crucial input required in the construction and infrastructure
development industry and is produced from iron ore and thus demand for iron ore is
relatively inelastic. The iron ore industry in Australia faced a decline in demand in the
recent times, due to decline in economic growth in China. Hence, the iron ore
industry in Australia contracted.

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