Is the Australian Mining Boom Over?

Reading the newspaper, one could be forgiven for thinking that the Australian Mining economy had stopped cold. Just a week ago, the Reserve Bank came out with their minutes from the September meeting that spoke of weakening commodity prices and more general concerns around the mining sector. This was the key reason behind the central bank’s decision to cut rates.

“It seemed likely that mining investment would peak a little earlier and at a somewhat lower level than had previously been forecast,” the RBA said.

But is the mining boom over, or are the dynamics of the mining boom just changing?

Over the last two years, the cost of mining construction has skyrocketed throughout Australia as miners charged in willy-nilly looking to confirm production figures, build facilities and lock in supply contracts before their competitors. High commodities prices across the board for over a decade led a race to production that has caused many companies to get a little carried away. We can see this in their willingness to pay way over benchmark prices for unskilled labour and supply. This didn’t matter too much while commodity prices remained high. But recent weakness in the price of iron ore and coal, both of which fell over 30 per cent in August and September before recovering slightly, has led firms to review their costs, operations and plans for viability.

Behind the boom
Let’s look at the facts that sit behind the boom.

It is just over a year since resource commodities prices peaked in the second half of 2011, around a decade since the resource boom began.

According to the September 2012 report from the Bureau of Resources and Energy (BREE), the latest forecasts of volumes and prices show two distinct trends. Firstly, the prices of many resources have moderated from historic highs in 2011 and further declines are expected over the medium term in US$ terms. Second, Australian export volumes, especially in terms of bulk commodities, have grown rapidly and are expected to hold these levels for several years to come. The net result is that the value of resource and energy exports in 2011–12 are expected to be 8 per cent higher than in 2010–11 and to total $193 billion.

The projection for the value of resources and energy exports in 2012–13 is for a year-on-year decrease of about 2 per cent, with the total value of resources and energy exports expected to total $189 billion.

“Is mining investment approaching its peak? Yes. But mining investment still has some way to run”.

“The first phase of the mining boom, the sustained rise in commodity prices that boosted growth in national income, probably has ended,” suggest the JP Morgan economists in the International Times this month. “But the more durable and arguably more important volume phases of the mining boom have much further to run”.

In other words, data shows China has grown very rapidly to a point and is now plateauing. This means that while China initially demanded more and more iron ore, copper, and coal, now it is expected China will settle at a more consistent demand level.

At the same time, the development of our mining and energy industry projects are now well underway, with the value of resource projects currently under development in Australia worth $264bn to the construction pipeline. According to a range of economists, advanced minerals project construction is expected to peak in 2013-2014. But the really interesting point of note is that of this project construction pipeline, two-thirds is represented by “very major” LNG projects, the National Bank economists note, and their development extends though to 2017.

“Is mining investment approaching its peak? Yes. But mining investment still has some way to run”.

What comes after production is the period of operation, where many of our mines and facilities are expected to operate at near capacity for ten to twenty years, depending on their mine lifecycles. During this phase, the large capital expenditure budgets of initial engineering and construction go away, but the export impacts and economic benefits continue to be reaped as we extract our natural resources and continue to contribute to our nations Gross Domestic Product (GDP), although at a lower level to the period in which the engineering pipeline is at its strongest.

The impact on labour forces
The estimated capital expenditure on the rollout of resources projects amounted to about $32 billion in 2010-11, rising to $56 billion in 2011-12 and $78 billion in 2012-13. The estimates suggest that spending will peak in 2013-14, at about 6 per cent of GDP committed projects. But, as the projects are completed, capital spending is estimated to fall by 80 per cent to about $17 billion by 2016-17. Construction employment on these projects, as inferred from the project totals specified by the companies, is expected to peak at about 80,000 in 2013-14 but to fall sharply after 2014-15. What will happen to this labour force after the construction boom is over? Will we have other industries for our workforce to move to or will we face a classic case of Dutch Disease that has been known to occur in other countries when natural resource exploitation increases the currency and punishes industries like manufacturing that are dependent on competitive export rates. For this, only time and our currency will tell.

Deferrals and deletions of projects
The market is somewhat panicked by the number and level of recent project deletions or deferrals, but CommBank notes such deletions do not actually make up a large proportion of all projects. Data suggests the value of all projects deleted over the past 13 months (including Olympic Dam and Outer Harbour but not, as yet, the FMG final phase) adds to $51bn or 11% of all advanced and less advanced projects. The impact of this is expected to add up to a 2% decrease in mining exports in the financial year to June 2013.

The deletions and completion of the construction phases will undoubtedly take the pressure off costs in coming months and years, allowing the labour market to settle down and provide a bit of natural selection to the projects that are indeed the most financially viable. But a 2% fall in export values does not signify the end of the mining boom… not yet anyway.

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