Australia Wheat Suffers From Drought With Miners West of Flood

Bloomberg--As Australia’s worst floods caused as much as $20 billion of damage to eastern states, 3,000 kilometers (1,900 miles) to the west farmer Pete Mills is battling a Chinese mining company for water after a decades-long drought.

“It’s ironic that they’re underwater and we can’t get enough of it,” said Mills, 44, as flies buzzed around his battered cowboy hat in the 35 degree Celsius (95 Fahrenheit) heat. “It’s noticeably getting worse. I’m worried this new mine is going to take the water that’s left.”

The A$1.8 billion ($1.8 billion) iron-ore project, a venture between China’s fourth-largest steelmaker Anshan Iron & Steel Group and Perth’s Gindalbie Metals Ltd., has applied to use water from the same underground supply that irrigates Mills’s 4,000-hectare wheat and sheep farm.

At stake is the output of the country’s biggest wheat- growing state at a time when global food shortages have pushed prices to records. The drought has already prompted the government of Western Australian state Premier Colin Barnett to cut its economic growth forecast for the year to June 30 to 4 percent, from 4.5 percent.

Anshan and Gindalbie’s Karara mine is the first of at least eight magnetite iron ore projects planned for the state’s Mid West grain belt in the next decade. Mines need water to help dig out and process the ore, remove waste rock and to suppress dust to meet air quality rules.

“We haven’t had many conflicts between mining companies and other water users in the past because there hasn’t been a big mining industry in the Mid West,” said Phil Kneebone, spokesman for Western Australia’s government-run Water Corp., which supplies drinking water to communities. “Mining companies do use a lot of water.”

Western Australia produced A$2.08 billion of wheat in the year ended June, 2010, according to the state’s Department of Agriculture and Food. The industry is dominated by CBH Group, a growers’ co-operative that’s the state’s largest grain handler. Competing with the state’s farmers are about A$170 billion of mining projects in the pipeline over the next five years.

Queensland Floods

It’s a far cry from the devastation in the east of the country, where flooding since November killed as many as 32 people. Queensland Premier Anna Bligh says the reconstruction effort will cost at least A$5 billion, and some economists estimate A$20 billion may be needed to repair the damage as the flooding also hit Victoria and New South Wales. More damage is expected as category five cyclone Yasi brings hurricane-force winds and rain to Queensland.

In Western Australia, which covers more than a third of the continent, the story is the opposite.

About $50 billion worth of mining and energy projects need water, according to Department of Water Director General Maree De Lacey. Mining is the largest user, taking 27 percent of total licensed water compared to 22 percent for agriculture, she said. Six years ago, agriculture used 37 percent and mining 26 percent.

Grain and Minerals

Australia’s export earnings from energy and minerals in the three months to Sept. 30 totaled A$44 billion, while the value of wheat exports for the year to June 30, 2011, is forecast to be about A$4.7 billion, according to the Australian Bureau of Agricultural and Resource Economics and Sciences. World food prices rose to a record in December on higher costs for sugar, grain and oilseeds, the United Nations reported on Jan. 4.

Gindalbie, in which Anshan Steel holds a 35.9 percent stake, says it applied to use 5.3 gigaliters, or 11 percent of the 49 gigaliters available in the Parmelia aquifer, from which Mills and other farmers draws their water through bores.

“Karara has spent around $3 million conducting extensive tests on the aquifer and the sustainability of our water usage plans,” Gindalbie corporate affairs manager Michael Weir said in an e-mail. When the mine starts, it will generate A$363,000 of export revenue for the state for each megaliter of water used, he said.

Mills said the project will use water from only one part of the aquifer, draining as much as 87 percent of that area’s total allocation and leaving farmers with little.

First of Many

The Karara mine and other magnetite iron ore projects will be serviced by A$4 billion of the new Oakajee port and rail infrastructure project to be built by Japan’s Mitsubishi Corp. and Australia’s Murchison Metals Ltd., which are also developing the Jack Hills project in the area.

Magnetite is a lower grade and needs more processing than the hematite ore found to the north in the Pilbara region, from where BHP Billiton Ltd., Rio Tinto Group and other miners shipped iron ore worth A$33.7 billion in the 12 months to June 30, 2010. Demand for magnetite from Chinese steelmakers has increased as the nation’s refineries are geared to take the ore.

Citic Pacific Ltd., an arm of China’s biggest state-owned investment company, built a 51-gigaliter desalination plant for its A$5.2 billion Sino Iron magnetite project in the Pilbara.

‘Hot, Hard and Flat’

“Western Australia is a very hot, hard and flat county on which it’s hard to store water,” said Peter Strachan, who heads Perth-based independent advisory firm StockAnalysis. “Processing these magnetite ores is going to be pretty greedy for water.”

Figures from the government-run Bureau of Meteorology show a significant decrease in rainfall since the mid-1970s, according to bureau forecaster Patrick Ward. Dams servicing the Perth area are less than 30 percent full.

“The winter rains have become more unreliable and that seems to be a trend that will continue,” Ward said. “Some areas where agricultural crops are marginal might soon tip over so they’re unsustainable.”

The state’s second government-run desalination plant is due to start in the second half of the year.

“The greatest restraint on Perth and Western Australia is water,” Barnett told reporters in November in Perth, where homeowners are allowed to water their gardens with automated irrigation systems for 20 minutes a week. “We’ve had our driest year ever, so that’s created an acute problem.”

On his farm about 350 kilometers to the north of Perth, near Australia’s largest inland grain storing facility, Mills is helping petition the government for water rights.

“I’m worried that this is just the start and other projects that are planned in the area will take all the groundwater,” he said.

To contact the reporter on this story: Jason Scott in Perth at Jscott14@bloomberg.net