Mining investment in Australia will slump 40 per cent over next four years according to a new report by industry analysts.
“In terms of the mining investment bust, we have hardly begun – this has a long way to run,” said Adrian Hart, Senior Manager of BIS Shrapnel’s Infrastructure and Mining Unit. “While investment has already fallen sharply across coal, iron ore and other commodities, it was the boom in gas which drove the peak in investment in 2013/14. Indeed, without oil and gas, mining investment would have fallen 25 per cent in the last financial year. However, the completion of a range of large gas projects on the east and west coasts will be the key driver of the long slump in investment from here.”
According to BIS Shrapnel’s Mining in Australia 2014 to 2029 report, mining investment, production, contractor services and employment will follow very different paths over the next five years. The mining investment boom peaked in 2013/14 at $93.1 billion (constant 2011/12 prices) and is expected to decline 40 per cent over the next four years. Meanwhile, mining production is forecast to surge by one third over the same period, driving a corresponding increase in mining operations activities, maintenance and exports.
“With public investment set to fall further through 2014/15, and most industry sectors not yet needing to invest to cater for strong demand growth (outside of parts of the housing market), the economy is expected to remain weak before recovering after the middle of the decade,” said Hart. “While there will be increasing pressure for governments to step in and promise growth through infrastructure spending, it is important that they remain focused on delivering projects that meet cost-benefit objectives.”
Yet the BIS Shrapnel report points out that it is not all bad news in the mining industry, with a boom in mining production, operations and maintenance to roll on right through the next five years.
“Essentially, the investment boom continues to shift to an echo production, operations and maintenance boom,” said Hart. “Over the past three years, the real value of mining production has increased by 30 per cent. It now makes up 10 per cent of the national economy on this measure. Another 33 per cent growth is expected over the next five years, with the share rising to 12 per cent. In Western Australia, the value of mining production will overtake that of the entire Australian manufacturing sector during 2014/15. This is the new face of the mining boom in Australia.”
Even so, severe challenges are expected to remain for both miners and industry contractors, according to Mining in Australia 2014 to 2029 report author and BIS Shrapnel economist, Rubhen Jeya:
“The much publicised losses in employment and the closure of mining operations are the consequences of a market reeling from lower prices, stubbornly high Australian dollar, and weaker growth in export demand – in contrast to the favourable period of investment that accompanied record prices during the 2000s,” said Jeya.
“The price of coal and iron ore – the two flagship bulk commodities which had held Australia’s exports high over the last few years – have suffered significantly over the past years, recording multi-year lows. Miners should expect these less than ideal conditions to continue over the next few years. The relatively high Australian dollar does not make the situation any better.
“Miners have responded to these conditions by making deep cost cuts and redrawing mine plans in the hope of increasing productivity and efficiency within their existing operations. Coal miners with take-or-pay contracts are hurting. The price for thermal coal has stayed too low for far too long and some have either gone belly-up or are teetering on the precipice. The flip-side is that as this ‘natural attrition’ continues, the effect of withdrawing supply from the market enhances upside possibilities for coal prices. Nonetheless, hard choices on operational viability need to be made. It won’t be an easy environment to navigate.
“Overall, contractors and suppliers to the mining industry should note that the end of the current boom in mining investment still presents opportunities in other parts of the mining boom, which are still unfolding: operations, production and maintenance. And, eventually, global efforts to slash investment in response to currently weak prices will itself help create the price conditions for new investment cycles in future. The challenge is to make the right strategic choices today to take advantage of the opportunities as they come along, commodity by commodity, region by region, in what will remain a highly cyclical industry.”
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