MINING PRODUCTION AND INCOME

MOTIVATION

Australia has experienced a mining investment boom unprecedented on an historical scale, particularly related to coal, iron ore, and liquefied natural gas (LNG). The investment boom has largely wound down, but the increase in capital stock is expected to facilitate higher levels of mining production.

The ABS has developed a new experimental table that highlights mining production and income, allowing deeper macroeconomic insights about how the mining industry has evolved over time to be unlocked.

The importance of the mining industry to Australia’s macroeconomic development over the past 24 years is illustrated by the change in its share of current price gross value added. The industry contributed 8.8% of gross value added in 2017-18 compared to 4.7% in 1994-95, an increase of 4.1 percentage points. Over the same period, the contribution of the manufacturing industry fell 8.1 percentage points: it contributed 14.3% of gross value added in 1994-95, compared to 6.2% in 2017-18. Mining’s share of gross value added peaked in 2010-11, contributing 9.9%.


CONCEPTS

The table is modelled on the agricultural income table, which is already part of Australian System of National Accounts (cat. no. 5204.0). It presents annual data, with estimates compiled in current price terms.

The table shows the value of primary mining output by broad commodity type (aligned to the Supply-Use Product Classification, or SUPC), as well as aggregate secondary production (production of non-mining products by the mining industry). Gross value added is derived by deducting from total output the value of intermediate inputs used up in the production process. While gross value added has been published in the national accounts for some time, this is the first time that statistics for output (by commodity) and intermediate use of inputs have been published for the mining industry.

Gross value added (after subtracting taxes less subsidies on production) can be decomposed into compensation of employees and gross operating surplus. These aggregates are the gross returns to labour and capital. Net operating surplus is derived by deducting consumption of fixed capital from gross operating surplus. This item represents the return to capital after accounting for the decline in the value of the capital stock through its use in production.

The net operating surplus is the financial platform from which distributions of income are made. For the mining industry, these distributions take two broad forms. First, there are payments of property income, which include interest and dividend payments, as well as royalties paid to governments. These payments are recorded on a net basis in this analysis. Second, there are current transfer payments. For the mining industry, transfer payments include company income tax, the Petroleum Resource Rent Tax and the Mineral Resource Rent Tax.

The pool of funds remaining after payments to labour, payments of property income, and after accounting for the decline in capital stock, represent retained mining income. Retained mining income can be used for new investment on own-account or to pay down debt. Conceptually, this is the same as ‘net saving’ in an institutional sector context.

The relevant national income accounting identities are:

	Total output = primary output + secondary output
	Gross value added = total output - total intermediate use
	Gross operating surplus = gross value added - compensation of employees
	Net operating surplus = gross operating surplus - consumption of fixed capital
	Retained mining income = net operating surplus - distributions

This analysis represents a macroeconomic view of the mining industry, and is not an exercise in adding up company accounts. Retained mining income in this context is economic income, and represents a fundamentally different notion to that reflected in Australian Industry (cat. no. 8155.0), which is based on taxation and business accounting concepts.


SOURCES AND METHODS

Gross value added

For the period 1994-95 to 2016-17, estimates for output, intermediate use and gross value added are sourced from balanced annual supply-use tables. Estimates for compensation of employees and taxes less subsidies on production are also sourced from supply-use tables. Estimates for consumption of fixed capital are derived within the capital stock model.

For detail on supply-use tables and their role in compiling national accounts estimates, see chapter 7 of the Australian System of National Accounts Concepts, Sources and Methods (CSM) manual (cat. no. 5216.0). For information on the capital stock model, see chapter 14.

Estimates for 2017-18 are derived via extrapolation from the 2016-17 estimates:

• Primary output for all commodities except oil and gas – Sales data at the mining industry sub-division level is sourced from the quarterly Business Indicators (cat. no. 5676.0) collection and is used as an indicator. This assumes that sales data disaggregated by industry subdivision is a reasonable proxy for output by commodity.
• Primary output for oil – Volume production data is sourced from Australian Petroleum Statistics, and multiplied by an appropriate price index to generate a current price indicator series. This indicator series is then used to derive the 2017-18 estimate.
• Primary output for gas – The process is identical to that for oil.
• Total intermediate use – Business operating expenses data for the mining industry is sourced from the quarterly Business Indicators collection, and used as an indicator.
• Gross value added – This value is aligned to the current price measure estimated as part of the Australian System of National Accounts compilation. The compilation method is outlined in chapter 9 of the CSM – see tables 9.39 to 9.43.
• Secondary production is therefore estimated residually, via underlying national income accounting identities.
• Compensation of employees – Wages paid by the mining industry is sourced from the quarterly Business Indicators collection, and used as an indicator.

Gross operating surplus and net operating surplus are derived residually via national income accounting identities.

Net property income payable

Interest and dividends receivable and payable by mining companies is sourced from unpublished data collected as part of the quarterly Business Indicators survey, and is available from 2009-10. Data from the annual Australian Industry (cat. no. 8155.0) collection is used to backcast the net interest estimates from this point. Government Finance Statistics data for royalties received by government from the mining industry is the primary data source for the entire time span.

Current transfers payable

These estimates are derived from the Australian Taxation Office’s Taxation Statistics publications, Commonwealth government Budget Papers, and the Government Finance Statistics dataset.


ANALYSIS

Annual mining production and income statistics for the last 5 years appear below. The full time series is available in the Data Cubes section in the Downloads tab.

		June 2013	June 2014	June 2015	June 2016	June 2017	June 2018
Primary output
	Coal	41 430	42 250	40 036	36 883	57 820	65 644
	Gas	21 935	24 225	24 724	26 506	33 079	46 506
	Oil	15 581	15 427	10 649	7 273	6 542	7 354
	Iron ore	60 471	76 163	55 351	48 811	63 774	63 972
	Gold ores	12 381	10 140	10 386	11 224	11 911	13 735
	Non-ferrous metal ores (excl gold)	25 084	26 766	27 438	27 592	26 034	29 761
	Other mining	4 980	5 693	4 822	4 622	4 982	5 597
	Services to mining	20 496	21 317	19 851	16 877	16 154	17 251
Total primary output		202 358	221 981	193 257	179 788	220 296	249 820
Secondary output		22 953	22 549	22 062	17 772	16 795	13 339
Total output		225 311	244 530	215 319	197 560	237 091	263 159
less Total intermediate use		107 386	110 844	107 529	100 444	102 766	111 573
equals Gross value added		117 925	133 686	107 790	97 116	134 325	151 586
less Compensation of employees		29 736	30 434	29 849	2 8211	26 061	27 354
less Other taxes less subsidies on production		2 204	2 372	1 591	1 647	1 671	1 656
equals Gross operating surplus		85 985	100 880	76 350	67 258	106 593	122 575
less Consumption of fixed capital		33 169	38 625	42 703	46 011	47 895	50 125
equals Net operating surplus		52 816	62 255	33 647	21 247	58 698	72 450
less 'distributions' of income(a)		43 860	46 750	47 912	43 496	39 278	68 972
equals RETAINED MINING INCOME		8 956	15 505	-14 265	-22 249	19 420	3 478
(a) This item includes: net interest payable, net dividends payable, royalties payable and company income tax payable.

Graph 1 shows the value of output of coal, gas, oil, and iron ore, in current price terms, over the period from 1994-95. It shows the value of coal output rising from around 2004-05, subsequently moving to higher levels around the latter half of that decade. Iron ore output has outperformed coal for much of the current decade. In 2017-18, the value of output of these two commodities was almost $130 billion. Gas output has recently begun to accelerate on the back of some large LNG plants moving into production.



Graph 2 shows the contribution of these four commodities, plus the remainder of primary output, to total primary output. The rising significance of iron ore is immediately apparent, as is the long term decline of oil. In 2000-01, iron ore represented 8.5% of total primary output for the mining industry, rising to 34.3 % in 2013-14. Over the same period, the share of primary output attributable to oil fell from 21.7% to 6.9%, falling even further to represent just 2.9% of primary output in 2017-18. Coal has always been an important commodity, regularly contributing between one-fifth and one-third of total primary output of the mining industry since 1994-95.


The increase in the value of output has been driven by higher volumes of physical production, as well as elevated prices. Prices for coal and iron ore began to rise around 2005-06, driven by stronger demand from China, and augmented by demand from other nations such as India, Japan and South Korea. Prices for coal and gas have not returned to pre-2005 levels, still remaining somewhat elevated. The coal deflator in 2017-18 is almost 6 times its value in 1994-95. Graph 3 shows the price deflators used in compilation of the national accounts for these same four commodities.




As the industry ramped up production to take advantage of higher prices, more intermediate inputs were required. Gross value added rose because even though the industry used more intermediate inputs, the value of output rose at a faster rate. This relationship is illustrated in Graph 4.



Graph 5 shows gross operating surplus (GOS) and compensation of employees (COE), which are the gross returns to capital and labour. Returns to capital are significantly larger than returns to labour. While returns to labour rose during the investment boom, with compensation of employees peaking in level terms 2013-14, it now appears to be gradually softening. Volatility in gross operating surplus partially reflects volatility in commodity prices, with windfall gains arising from unexpected price shocks almost entirely accruing to capital.



Capital formation is recorded in the national accounts on a change of ownership basis (footnote 1). Some large construction projects, particularly in the liquefied natural gas (LNG) space, took many years to complete. Components of these projects were captured as gross fixed capital formation and therefore brought into the capital stock when ownership was deemed to have changed. In the national accounts, consumption of fixed capital is recorded for all assets in the capital stock, irrespective of whether they are actually in productive use or not.

Graph 6 shows net operating surplus (NOS) and consumption of fixed capital (COFC). The impact of the mining industry’s capital expansion can clearly be seen in the profile of consumption of fixed capital. Consumption of fixed capital exceeded net operating surplus in 2014-15 and 2015-16.



Graph 7 shows net operating surplus (NOS) graphed against the net total of distributions paid. Retained mining income is equal to net operating surplus minus distributions, and is equal to the gap between the two series in the graph. More value was distributed in terms of property income and company tax in 2014-15 and 2015-16 than the net return to capital, which drives retained mining income negative. Retained mining income in 2015-16 is also driven negative by falls in commodity prices in that year. Large dividend payments in 2017-18 meant that nearly all of the mining industry’s net operating surplus was distributed in that year.




FUNDING THE INVESTMENT BOOM

Assuming no capital transfers or net acquisitions of non-produced non-financial assets, the mining industry’s borrowing requirement can be approximated. Starting with retained mining income, this is done by adding back consumption of fixed capital, then subtracting gross fixed capital formation and change in inventories. These last two items represent economic investment, and the imbalance between saving and investment reflects the industry’s borrowing requirement.

Graph 8 shows that, between 1994-95 and 2010-11, the industry was able to fund its capital formation program largely from retained earnings. Elevated commodity prices between 2005 and 2011 allowed the industry to build up financial reserves as retained income. These reserves were sufficient to fund capital investment between 2005 and 2011, but were insufficient to support the larger investment boom starting around 2012.




FEEDBACK

The Australian Bureau of Statistics welcomes feedback. For more information, please contact Jason Annabel (j.annabel@abs.gov.au ; (02) 6252 7488).

FOOTNOTE 1: For more information, refer to Feature Article: Mining Investment in ABS Publications, published in Private New Capital Expenditure and Expected Expenditure, Australia, March 2012 (cat. no. 5625.0). <back>