Australia Mining Outlook 2022: Energy Shift to Bring Opportunities for Investors

What trends and catalysts are ahead for Australian mining?

Since COVID-19 hit the world in 2020, countries across the globe have implemented different strategies to manage its impact, with the mining industry seeing its own specific challenges.

In Australia, a major issue has been staff shortages, given border restrictions and supply chain disruptions, but output of key commodities has been largely unaffected, David Franklyn of Argonaut told INN.

“The Australian mining sector coped exceptionally well during COVID-19 in 2021,” he said. “Really in 2021, it had almost no impact on the entire Australian mining sector, in particular in Western Australia.”

In fact, Western Australia's resource sector delivered mineral and petroleum sales valued at a record AU$210 billion in 2020/2021, compared with the previous highest sales value of AU$177 billion set in 2020.

Furthermore, the entire Australian resource and energy sector is expected to see record exports for 2021/2022. Driven primarily by higher commodity prices and a weaker Australian dollar, export earnings hit a record $310 billion in 2020/2021, with earnings forecast to rise a further 22 percent in 2021/2022 to AU$379 billion.

As the new year begins, the outlook for the Australian mining space is looking bright, not only from an export perspective, but also in terms of commodity prices.

“Industrial metal prices will continue to rise, supported by lack of supply and rising demand as the globe continues to recover and restrictions lift,” Jessica Amir, Australian market strategist at Saxo, told INN.

For the expert, the focus of major global players such as the US and China will be on green transformational initiatives, which require industrial metals.

“With copper and aluminium stock already running low, development could send prices back towards — and potentially above — the record levels seen last year,” Amir said. “Commodities and energy stocks will likely remain the best performers — they are so far in 2022.”

Copper prices hit an all-time high in 2021, surpassing the US$10,700 per tonne level on the back of higher demand expectations, while aluminium broke the US$3,000 per tonne level to hit nearly US$3,200, rallying to a 13 year high.

In 2022, Argonaut’s Franklyn is expecting a transition in the Australian mining space. “Historically, the Australian mining sector has been focused on iron ore and coal (thermal and met), whereas we are seeing a rejuvenation in the base metals such as copper, nickel and zinc, along with a rapidly expanding lithium sector,” he said.

Speaking about trends he is expecting to see in 2022, Franklyn said the green energy transition will continue to be a key theme. “The big issue is can supply keep up with demand, because you can build a new battery factory in a couple of years, but to build a new mine takes a decade,” he said.

Locally and globally the green transformation is highly watched, with stimulus being a big part of the transition.

“We have paper thin, and little to no electric vehicle stimulus,” Amir said. “Keep a look out for federal stimulus in the lithium and hydrogen sectors closer to the election in May.”

Commenting on what could be ahead for Australian companies, Amir said the biggest challenge relates to rising interest rates and environmental, social and governance concerns.

“We saw what happened with Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO) getting its lithium-mining licence revoked due to environmental concerns,” she said.

For Franklyn, securing quality staff and equipment is currently the biggest challenge for miners in the country.

“Australia has the opportunity to be a green energy powerhouse if it has the political will and foresight, endowed with vast reserves of lithium, nickel, copper, rare earths, uranium and plenty of wind and sun to drive renewable energy production,” he said about the country's future possibilities. “There's potential to develop downstream processing, something Australia has not done well historically.”

What commodities should you watch out for?

When asked about which commodities he will be watching in 2022, Franklyn pointed out again that the green energy transition will drive long-term demand for nickel, copper and lithium, among others.

“While there will be volatility along the way as demand and supply mismatch, this is a 10 to 20 year transition and is the cornerstone of resource sector investing,” he said.

At the same time, there could be renewed opportunities in the oil and gas sector.

“We are likely to see funding for new fossil fuel projects constrained, putting pressure on supply, whilst demand will stay firm,” he said. “I think there's greater recognition, particularly on the gas side, that gas is perhaps a transition fuel, and it's going to be necessary to manage that transition from fossil fuels into green energy.”

Amir agreed, saying it is likely gas will see increasing demand, given that it's viewed as a bridge between coal and renewables. “Crude oil will likely tighten in supply again this year — several OPEC (nations) plus other nations are struggling to meet their supply quotas, and mobility is not even back at pre-pandemic levels,” she commented. “We have a long-term bullish view of the oil market.”

Despite what many market watchers may think given global headlines, coal will also likely continue to rise because it is a key source of energy, according to Saxo. “China, India and Russia make up 50 percent of global electricity consumption — 70 percent is from burning coal,” Amir said. “Last year, global electricity generated from coal surged 9 percent to a new record high in 2021, with China and India increasing coal demand.”

Looking over to mining businesses, Amir is interested in companies operating in different resource sectors, and she highlighted iron ore. “Australia's iron ore exports make up 60 percent of global supply, with most iron ore coming from Western Australia,” she said in conversation with INN. “Iron ore is also one of Australia’s biggest exports — so when iron ore rallies, it supports Australia’s GDP.”

Lithium is another one to keep an eye out for, as 60 percent of global lithium comes from Australia, and again mostly from Western Australia. “The lithium price is tipped to continue to rise to another record,” she said, adding that major lithium producers are optimistic about the space due to a lack of mining investment and rising demand.

But a sector that could be big for Australia going forward is hydrogen.

“The Australian government's hydrogen exports and domestic use could be worth up to AU$50 billion within 30 years, helping the world achieve deep decarbonisation,” Amir pointed out.

Stocks the analyst will be watching in 2022 include Pilbara Minerals (ASX:PLS,OTC Pink:PILBF) and Allkem (ASX:AKE,OTC Pink:OROCF), as well as Fortescue Metals Group (ASX:FMG,OTC Pink:FSUMF) alongside AGL Energy (ASX:AGL,OTC Pink:AGLNF) and APA Group (ASX:APA) for their hydrogen exposure; the latter two are a consortium.