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Too expensive: Mining industry at risk

Australian miners are no longer competitive, are losing market share and many projects are under threat. $121 billion in revenues each year are at risk says a report commissioned by the Minerals Council of Australia (MCA).

More than half of Australia’s coal, copper and nickel mines are more costly that the global average. Even in iron ore, Australia is losing its operating cost advantage, for most projects except for the established mines in the Pilbara, Western Australia. BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) have long had some of the world’s lowest cost iron ore mines, but increasingly, miners from Latin America and Africa are matching or undercutting their costs.

Rapidly emerging resource-rich countries are stealing our market share, as rising costs, declining productivity and a deteriorating sovereign risk reputation, make Australia a less attractive place to do business.

Labour costs have increased dramatically, mainly due to skills shortages, with construction workers’ salaries increasing by an average 9% per year over the last three years and Australian engineering wages are 60% above the global average. The last year Australia reported an increase in productivity was 2003, while the Federal and state governments’ ongoing changes to royalties, carbon tax and resources tax schemes may have contributed to our loss of market share. Only iron ore managed to post a positive gain in market share over the past 10 years, and that was by just 1%.

Increasingly, Australian miners are looking overseas for opportunities. 160 listed Australian mining companies were pursuing African mining projects in 2010, compared to just 54 in 2003.

Other miners are exploring in other regions, such as Troy Resources Limited (ASX: TRY) with operations in Brazil and Argentina, while Kingsrose Mining Limited (ASX: KRM) operates a gold mine in the Phillipines. Both companies have significantly lower costs of production that the average Australian gold miner.

The Minerals Council report suggests that Australia needs to take several steps immediately to alleviate the problems, including discussion of the opportunities and benefits at risk, address cost pressures – including labour and input costs and a new program of structural reform to help the resources industry regain its world-leading competitiveness.

While you could expect the Minerals Council to push their own barrow, the report does raise some important points about what Australia could do to improve the mining industry. If we don’t, we could face losing billions of export dollars from commodities.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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