Mining employment in SA - exploration and exports boom but what about jobs?

Mining employment in SA - exploration and exports boom but what about jobs? John Spoehr and Simon Molloy March 2011 Prepared with assistance from the: Institute for Minerals and Energy Resources AISR [Report name] 1

CONTENTS 1 CONTEXT... 2 1.1 MINING EMPLOYMENT TRENDS... 3 2 FACTORS DRIVING INCREASED DEMAND FOR LABOUR... 7 2.1 PRODUCTIVITY AND PRICE EFFECTS... 8 2.2 SKILL SHORTAGES... 10 2.3 CHANGES IN WORK ARRANGEMENTS... 11 3 CONCLUSION... 12 4 REFERENCES... 13 TABLE OF FIGURES FIGURE 1: PERSONS EMPLOYED, MINING, SOUTH AUSTRALIA, BY QUARTER, 1984 TO 2010... 3 FIGURE 2: PERSONS EMPLOYED, MINING, BY MINING ACTIVITY, SOUTH AUSTRALIA, BY QUARTER, 2002 TO 2010... 4 FIGURE 3: PERSONS EMPLOYED, MINING, BY STATE, BY QUARTER, 2002 TO 2010... 5 FIGURE 4: PROPORTION OF TOTAL STATE EMPLOYMENT IN MINING, BY STATE, AUGUST 2002 AND 2010... 6 FIGURE 5: INDICATORS OF MINING INDUSTRY ACTIVITY, 2000-01 TO 2008-09... 7 FIGURE 6: INDEX OF MINERAL AND ENERGY COMMODITY PRICES... 9 FIGURE 7: MINING INDUSTRY MFP AND PRIMARY INPUTS... 10 FIGURE 8: MINING MFP WITH DEPLETION AND CAPITAL EFFECTS REMOVED... 10 AISR Workforce report: the South Australian minerals and resource sector 1

1 CONTEXT The mining and resources sector offers the South Australian economy the desirable prospect of increased diversification and renewed export-driven economic growth. It is therefore strategically important to the State and accordingly the current Government has taken a strong interest in the resource sectors growth and development. The prospects for growth in the sector are strong and employment growth is expected to flow from this. There is ample evidence of rapidly increasing activity in the South Australia mining sector: new mines are opening, exploration is at a historically high level, the pipeline for the new mine developments is at unprecedented levels and mining is now South Australia's largest export earner. Data from Primary Industries and Resources South Australia (PIRSA) indicate that mining exports, royalty payments and production value are all increasing in value. In the context of this growth, it is unsurprising to find industry concerns with skills shortages. In 2009 the Resources and Engineering Skills Alliance (RESA) reported that, based on industry consultations, that mining stakeholders reported that they were experiencing: - Continuing problems sourcing specialist professional, para professional and skilled trade s employees. - Ongoing concerns at the relatively poor literacy and numeracy levels of school leavers and young people applying for positions with employers. - Some attraction and retention pressures from the emerging mega-projects in WA and Qld. - No shortages of applicants/labour for entry level and semi skilled positions. - No shortages of applicants for apprenticeships. (RESA 2009, p5) It seems reasonable to expect that, in the context of strong industry growth, we would observe an increase in mining employment in South Australia. Indeed, in the period from 2000 to 2007 this is exactly what we observe. Subsequently, however, employment has fallen from a peak of around 12,000 in 2007 to around 7,700 persons in November 2010. Clearly, the global financial crisis has played a role in this decline. Nonetheless, it is curious that, given all the growth indicators described above, that employment has fallen as much as the official figures indicate and that it has not recovered more rapidly. It is worth emphasising that most of the indicators of mining activity have shrugged off the global recession without diverging from their upward trends. The absence of a recovery in employment in South Australia has important implications for the conduct of mining sector workforce policy. Do these low levels of employment suggest that the calls from industry to address skills shortages are unfounded? Or do these low levels of employment in fact reflect systemic persistent shortages of labour for the South Australian mining sector in the context of a national (and global) mining boom? Is the historically low level of employment merely a momentary aberration as the industry moves from the post-gfc period into a phase of sustained output and employment growth? Or have there been fundamental changes in productivity and therefore the relationship between outputs and labour inputs in the industry which need to be factored into our thinking about workforce planning going forward? Alternatively, have changes in the measurement of employment in the sector affected the outcome? In addition, the impact of the Federal Government s taxation policy for the resources sector needs to be considered. All of these questions are highly relevant to workforce policy in the mining industry. This paper examines published employment statistics and indicators of activity in the South Australian mining industry and offers AISR Workforce report: the South Australian minerals and resource sector 2

Nov-1984 Nov-1985 Nov-1986 Nov-1987 Nov-1988 Nov-1989 Nov-1990 Nov-1991 Nov-1992 Nov-1993 Nov-1994 Nov-1995 Nov-1996 Nov-1997 Nov-1998 Nov-1999 Nov-2000 Nov-2001 Nov-2002 Nov-2003 Nov-2004 Nov-2005 Nov-2006 Nov-2007 Nov-2008 Nov-2009 Nov-2010 Persons '000 some suggestions for explaining the relatively low level of employment at this time in the face of increasing mining industry activity. This increase in activity is set to generate a rise in employment demand in the sector, particularly if large scale projects like the expansion of Olympic Dam proceed in 2012. 1.1 MINING EMPLOYMENT TRENDS The long term view of mining employment 1 in South Australia from 1984 to the present is surprising in that employment in the sector is currently only slightly higher than the level it was 26 years ago. Employment in this period falls into three broad phases: relatively high levels of activity between 1985 and 1987, a long trough of relatively low (around 4,000 persons employed) between 1988 and 2003 and a period of renewed but more volatile activity between 2004 and 2008 with a significant peak of 12,400 persons employed in February 2007 followed by a fall off to the present level of 7,700 employees (November 2010). There is tentative evidence of an upturn in employment from lows of around 6,000 persons in 2008 and 2009 but it is a little early to assert that this is the beginning of the sustained increase in employment that could be expected to be associated with the relatively rapid increases in mining activity indicators. Figure 1: Persons employed, mining, South Australia, by quarter, 1984 to 2010, 000 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Source: ABS Cat 6291.0.55.003 - Labour Force, Australia, Detailed, Quarterly, May 2010, Table 5 1 The ABS, Labour Force, Australia, Detailed (Cat 6291.0.55.003), provides estimates of employment by industry by State, most recently for August 2010. The ABS includes in its definition of mining includes the mining of minerals, oil and gas extraction, and exploration and mining services. It is worth noting that the PIRSA includes metal refining and manufacturing within its definition of mining. AISR Workforce report: the South Australian minerals and resource sector 3

Digging deeper into the structure of employment, the ABS provides a breakdown of employment by mining activity for Australia as a whole. (Figure 2) show the two most volatile sub-categories of employment in the period 2002 to 2010 together with total industry employment. This indicates that the main factors driving the decline in employment were a collapse in employment in the category Metal Ore Mining from over 7,000 persons in November 2006 to around 1,500 by August 2010. This decline was, to some extent, offset by a rise in exploration activity in mid- to late-2008, but this sub-category also declined rapidly after February 2009 before recovering somewhat in mid May 2010. Figure 2: Persons employed, mining, by mining activity, South Australia, by quarter, 2002 to 2010, 000 14 12 10 8 6 4 2 0 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 Metal Ore Mining Exploration and Other Mining Support Services Total Source: ABS Cat 6291.0.55.003 - Labour Force, Australia, Detailed, Quarterly, May 2010, Table 5 Trends in the mining sector employment in South Australia also need to be placed in the context of the national mining sector. Western Australia and Queensland are the big mining employers. In August 2010, for example, South Australia's employment of 6200 in the mining sector is small by comparison with Western Australia's 86,900 and Queensland's 51,600. New South Wales and Victoria also employs significantly more persons in mining with figures of 35,500 and 11,000 respectively. AISR Workforce report: the South Australian minerals and resource sector 4

Nov-2002 Mar-2003 Jul-2003 Nov-2003 Mar-2004 Jul-2004 Nov-2004 Mar-2005 Jul-2005 Nov-2005 Mar-2006 Jul-2006 Nov-2006 Mar-2007 Jul-2007 Nov-2007 Mar-2008 Jul-2008 Nov-2008 Mar-2009 Jul-2009 Nov-2009 Mar-2010 Jul-2010 Nov-2010 Persons '000 Figure 3: Persons employed, mining, by state, by quarter, 2002 to 2010, 000 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 SA WA Queensland NSW Vic Source: ABS Cat 6291.0.55.003 - Labour Force, Australia, Detailed, Quarterly, May 2010, Table 5 Also relevant, is the importance of mining in each state in terms of its share of total employment. Figure 4 shows mining employment as a percentage of total employment for each Australian state. It can be seen that mining has increased in importance in all states over the period 2000 to 2010. However, in South Australia, the increase has been relatively small while in both Western Australia and Queensland the proportion of employment in mining has approximately doubled in both cases. It is important to note that mining employment as a proportion of total employment is relatively low in South Australia. AISR Workforce report: the South Australian minerals and resource sector 5

Figure 4: Proportion of total state employment in mining, by state, August 2002 and Nov 2010, percent 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% SA WA Qld NSW Vic Tas NT ACT Aust Source: ABS Cat 6291.0.55.003 - Labour Force, Australia, Detailed, Quarterly, May 2010, Table 5 AISR Workforce report: the South Australian minerals and resource sector 6

2 FACTORS DRIVING INCREASED DEMAND FOR LABOUR The level of employment is driven ultimately by the interplay between output and productivity. If productivity is not changing and output is increasing we should observe an increase in employment. Beyond these obvious relationships between output, productivity and employment lie a set of complex measurement issues which presents significant challenges for making definitive statements on the course of these variables over time. PIRSA provides multiple sources of data on the state of the mining sector in Australia. All of these indicators show significant growth in activity over the period 2004-05 to 2008-09 (see Figure 5). In particular, except for mineral exploration and capital expenditure, the various indicators showed no significant decline. In most cases, an increase is evident during the period 2006-07 to 2008-09 when employment was in steep decline. Figure 5: indicators of mining industry activity, 2000-01 to 2008-09 Source: PIRSA website Source: http://www.pir.sa.gov.au/ data/assets/pdf_file/0018/132381/heithersay_sareic_2010.pdf accessed 15/11/2010 AISR Workforce report: the South Australian minerals and resource sector 7

In addition to this data on mining output, PIRSA produces a summary of the South Australian mining sector called South Australia's Mining Pipeline (PIRSA, 2010). It shows 12 major mines active in South Australia and 29 projects which are at some stage of feasibility study. These levels of activity represent substantial growth on previous long term trends. For example, until early this decade there were only four major mines in South Australia. If this growth is sustained or even accelerates then the absolute numbers of new employees required by mining may begin to become significant relative to the South Australia labour force. The evidence of increased activity in the South Australian mining industry seems emphatic. There are a range of possible reasons why this increase in activity is not being reflected in ABS employment statistics. Some of these are canvassed below. 2.1 PRODUCTIVITY AND PRICE EFFECTS The most obvious possible reason for falling employment in the face of increasing mining activity is an increase in labour productivity. Such an increase in productivity could be due to a number of factors including a relative increase in the use of capital in mining, a shift towards mining activity which is less labour-intensive (for example, a shift from underground to open cut mining) and an increase in the average level of skills and human capital in general of mining labour. As we shall see, the assessment of productivity in the mining sector is particularly complex and there is insufficient data to definitively assess the state of productivity in the mining sector in South Australia. Another factor which could lead to some decoupling of the relationship between labour inputs and outputs is that the indicators of mining activity are expressed in dollar terms and prices are changing. In particular, increases in the value of mineral production are, in significant part, due to increases in commodity prices. In a 2008 paper The Productivity Commission notes that: The mining industry has had a major influence on Australia s productivity performance and prosperity in recent years. While its influence on prosperity has been positive, the opposite has been the case in relation to productivity. A surge in commodity prices from 2003-04 to 2006-07 has been the major influence on the sector. Higher commodity prices have resulted in large increases in the value of output as well as in income and prosperity. But they have not induced a commensurate increase in the volume of mining output. Because substantially increased usage of capital and labour inputs has accompanied only a modest increase in output, multifactor productivity (MFP) has fallen. (Productivity Commission, 2008, pxv) The Productivity Commission reports real and nominal indexes of mineral and energy commodity prices for Australia (see Figure 6). These rise as expected and therefore go some way to explaining the rising value of output in the face of static or falling labour inputs. The critical question is the extent to which the apparent increase in mining output is due to commodity price increases, that is, the increasing value of mining output is driven primarily by price increases rather than increases in physical output. The behaviour of commodity indexes shown in Figure 6 suggests that price effects are significant. These indexes, however, are based on national output. The composition of South Australia s mineral output is quite different from the national aggregate output and therefore the national indexes will not provide an accurate picture of the overall movement in the prices of South Australian commodity outputs. Thus, to be definitive about the impact of prices and therefore the extent to which value changes are attributable to prices changes, it would be necessary to construct a South Australian commodity price index. AISR Workforce report: the South Australian minerals and resource sector 8

This would enable the aggregate value of production to be discounted for price effects and provide a more reliable basis for assessing labour productivity changes. Figure 6: Index of mineral and energy commodity prices Source: Productivty Commission 2008 In addition to the influence of commodity prices on assessments of productivity, a number of other factors need to be included in any analysis of productivity in the mining sector. The Productivity Commission points out that, because the quality of mining deposits is depleted over time, productivity may appear to fall by more than is the case if such quality depletion is taken into account. In addition, large capital expenditures and long mine development lead times will also adversely affect mining productivity. During a period of high mining investment, productivity may fall significantly due to this factor. Figure 8 provides the Productivity Commission s estimates of MFP allowing for mine quality and capital effects removed. The conclusion of this analysis is that underlying productivity is increasing if these effects are taken into account. It is still the case, however, that if mine quality is falling and investment is at a high level, productivity will appear to fall and more labour will be required to produce a particular level of mineral output so, again, increasing productivity cannot be called upon to explain increasing output and decreasing employment. Figure 7 shows trends in labour and capital inputs as well as multifactor productivity (MFP). If these trends for Australia are also characteristic of South Australia and they have continued to the present, then the trend for productivity would be downwards. Therefore it would not be possible, on this basis, to account for the divergence between mining output and mining employment being cased by an increase in productivity. This, in turn, raises the question of whether South Australia s productivity is likely to be similar or dissimilar to the Australia-wide experience. There are a number of factors that suggest that the South Australian industry may be atypical: the mix of commodities in South Australia is different to Australia; the scale of mining operations is, in general, smaller than in other states (especially Western Australia and Queensland) and there is a preponderance of new mine in South Australia which is likely to mean new techniques and technologies are being used (which may contribute to higher productivity). Figure 8 provides the Productivity Commission s estimates of MFP allowing for mine quality and capital effects removed. The conclusion of this analysis is that underlying productivity is increasing if these effects are taken into account. It is still the case, however, that if mine quality is falling and investment is at a high level, productivity will appear to fall and more labour will be required to produce a particular level of mineral output AISR Workforce report: the South Australian minerals and resource sector 9

so, again, increasing productivity cannot be called upon to explain increasing output and decreasing employment. Figure 7: Mining industry MFP and primary inputs Source: Productivty Commission 2008 Figure 8: Mining MFP with depletion and capital effects removed Source: Productivty Commission 2008 2.2 SKILL SHORTAGES It needs to be recalled that the interpretation of any particular set of employment statistics needs to take into account the state of the labour market. The expression economics that applies is: the short side dominates. If there is a shortage of labour in a particular market or market segment, then the reported employment statistics reveal the supply of labour. Conversely, if there are unfilled vacancies, the reported employment statistics will indicate the demand for labour. It is only when the particular market is in balance that employment statistics will indicate both supply and demand. When we observe that indicators of mining activity point to significant growth, the logical conclusion, notwithstanding the other factors discussed in the section, is an increase in the demand for labour. If, AISR Workforce report: the South Australian minerals and resource sector 10

however, there is insufficient labour supply to meet this demand, shortage will emerge which will, under the circumstances, probably grow over time. Therefore, to the extent that the mining labour market was in balance previously and is now experiencing an increasing shortage, the published statistics will show only the current labour supply and will not represent the true extent of demand in the market. This interpretation of the current statistics is consistent with the calls from industry stakeholders to address existing and looming labour shortages in the industry. 2.3 CHANGES IN WORK ARRANGEMENTS The mining industry makes significant use of contractors. These contractors are often large companies that service several industries such as mining, construction and infrastructure. It is possible that definitional issues for the ABS s Labour Force collection and an increase could lead to an understatement of mining employment. For example, a truck driver that is employed by a major subcontracting company might, in a given month, provide services to be mining industry, the transport industry and the construction industry. When such a worker responds to an ABS survey he or she may not be able to give an accurate picture of what industry labour services were supplied to. The ABS s Labour Force survey is a household survey in which respondents self enumerate. Answers to the question: What industry do you work for? may become less accurate over time as workers move into positions with contracting organisation which supply services across several industries. AISR Workforce report: the South Australian minerals and resource sector 11

3 CONCLUSION This paper has highlighted what can reasonably be called the South Australian mining employment paradox: that is why, in the face of rising activity in the mining sector, do we observe static or declining employment? The short answer to this question is that we do not have sufficient data to provide a rigorous answer. More specifically, in order to provide a rigorous evaluation of this paradox we would need to address following data deficiencies: To what extent is the increase in the value of output of the resources sector in South Australia been due to increases in commodity prices or increases in physical output? To answer this question the development of a South Australian commodity price index would be a useful first step. To what extent have changes in working arrangements in the in the resources sector primarily, a shift from employment to contracting led to understatement of the level of employment in the industry in the ABS statistics and, if this has happened, what can be done to derive more accurate estimates of the number of persons employed in the resources sector? What is happening to labour productivity in the South Australian resources sector? To what extent is a South Australian experience in this area atypical of the Australian average? To what extent is the apparently low level of employment in South Australia attributable to labour supply constraints? What is the extent of labour shortages for specific occupations/skills? What are the drivers of the demand for labour in the South Australian industry? To what extent has the supply of labour being detected by demand from interstate, in particular from the two big mining states? To what extent do factors such the GFC and the mining tax debate feature in the decision-making of resources sector employers? Can we quantify these impacts? Answers to these questions are required in order to form a clear picture of the current state of the resources workforce in South Australia. Without this clearer picture it is difficult to form definitive conclusions about how the South Australian Government should assist the industry in the areas of skills development and workforce planning more generally. AISR Workforce report: the South Australian minerals and resource sector 12

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