Why i’m not worried about the end of the mining boom

Wednesday, 3rd Oct 2012
Categories: Market News, Newsletter

mining boom

I don’t have to tell you that there has been a fair amount of talk recently about the supposed end of the resources boom, which has some property investors worried.

While I am not involved directly in the resources industry, I do invest a lot of time into researching issues that could potentially affect our clients and this always involves looking beyond the mainstream headlines.

Most of the negativity in the media has focused on the recent cancelling or postponing of a number of projects by major mining companies, falling commodity prices and waning demand from China. But the more I investigate the bigger picture of what is happening in Australia’s resources industry and the impact it will have on the economy (and property markets), the more I am convinced the naysayers will ultimately be proven wrong. Here are some of my reasons:

Plenty of investment ahead

BHP Billiton’s decision to shelve $US50 billion ($A47.89 billion) of major projects, including an expansion of its massive Olympic Dam uranium mine in South Australia, made for some big headlines. But such announcements need to be put into perspective.

Firstly, they relate to planned projects not started or completed ones. Secondly, recent postponements or cancellations make up a very small component of the total planned investment pipeline. Data suggest the value of all projects deleted over the past 13 months (including Olympic Dam and Outer Harbour) total $51bn or 11% of all advanced and less advanced projects.

In WA alone, the investment pipeline is extremely healthy. According to the WA Department of Mines and Petroleum, more than $180bn of projects are committed or under consideration in the state. This includes the $43bn Gorgon LNG project, the $29bn Wheatstone LNG project, Hancock Prospecting’s $9.5bn Roy Hill iron ore mine and Citic Pacific’s $8bn Sino Iron project.

The consensus seems to be that based on the active projects yet to be completed, iron ore-related capital spending is likely to peak this financial year, and coal and liquid natural gas related investment is likely to peak in 2014-15. But even if the peak is a few years away, many experts expect investment to remain high beyond that time-frame.

The Chinese juggernaut will continue

China’s economic growth over the past 10 years has been nothing short of staggering. And while the growth rate has recently decelerated, it still remains at an impressive level. Based on some people’s reactions you would think that China’s economy is contracting, which it certainly isn’t.

The rise in demand for our resources from China over recent years is not a short term phenomenon; it reflects a structural change in the world economy driven by China’s long term goal of lifting the living standards of a very large population.

It is premature to suggest that demand for our resources from China and increasingly India is going to cease anytime soon. China and India remain, on the whole, very poor countries with a per capita income of just $US8,400 and $US3,700 respectively, so there is clearly a lot of catch-up potential ahead. The amount of iron ore, coal and energy needed to power the industrialisation machines of these mega-nations is truly immense.

High costs will not send work overseas

Some commentators have claimed that labour costs are too high in Australia and mining companies will outsource work overseas. While our labour costs are high by international standards, recent decisions by some companies to outsource particular work to overseas companies, in my opinion, is more likely to do with the shortage of labour. In WA alone, there were recently more than 5000 job vacancies in the sector and interestingly almost half of the jobs were based in Perth.

Australia isn’t reliant on iron ore alone

With all the media coverage about the iron ore mines, it’s easy to forget that Australia mines and produces more than just iron ore. Significantly, LNG is becoming an increasingly important commodity. According to some reports, of the resource projects currently under development in Australia, around two-thirds are represented by very major LNG projects.

Has the real boom even happened yet?

Whether or not we’re nearing peak levels of mining investment, the fact remains that the important export boom has much further to run. Waning mining investment will definitely reduce future GDP growth but this will be more than offset by the ramp-up in output and exports. Once all the current major projects are completed and fully operational, I think we’ll start a whole new phase of prosperity that will last decades not years.

There will always be volatility in the short term but I am very optimistic about the long term prospects of our resources industry and the economy it will help support.

By Damian Collins