Measuring the mining investment cliff

For any economist that is burdened with a brain and unencumbered by an interest, there is really only one question that matters for Australia this year and it is this: when will mining investment peak and what will replace it?

An important part of answering this question will arrive next Thursday in the form of the ABS private capex survey, which includes estimates of capex spending intentions.

Westpac has released a useful note providing a range of scenarios for the capex release (which is quite difficult to read for the lay person) which helps with context. The note itself is quite complex sadly but it’s a nonetheless useful if you have the time.

The ABS estimates run two quarters in advance so this will be the first time we will get an idea of investment intentions for Q1 2013/14. Westpac offers four scenarios for that estimate:

Scenario 1, 2013/14: – a smooth rebalancing of growth
Est 1 of $150bn.
Implies an outcome of $170bn, growth of +2.5%
Mining: flat
Manufacturing & services: growth of 6%

Scenario 2, 2013/14: – a resilient result
Est 1 of $147bn.
Implies an outcome of $166bn, and a flat outcome
Mining: a decline of 2%
Manufacturing & services: growth of 3%
The RBA would arguably be encouraged by such a reading. This could be interpreted as a modest pace of decline in mining investment and tentative evidence of a pending modest improvement in investment across the broader economy.

Scenario 3, 2013/14: – no rebalancing of growth
Est 1 of $143bn.
Implies an outcome of $162bn, and a decline of 2%
Mining: a decline of 4%
Manufacturing & services: flat
Such an outcome and such a mix would add to concerns of a potential growth gap. This would confirm that mining investment is no longer adding to growth but was instead subtracting. Additionally, there would be no evidence that the non mining sectors are about to fill the gap.

Scenario 4, 2013/14: – a particularly weak result
Est 1 of $140bn.
Implies an outcome of $158bn, and a decline of 5%
Mining: a decline of 6%
Manufacturing & services: falls of 3%
Investment declining on a broad based front would be cause for concern. With fiscal policy contracting and the currency stubbornly high, monetary policy would have more work to do.

I personally think we’ll come out between Scenarios 2 and 3. But I also expect the survey to weaken all year.

Er 20130221 Bull Cap Ex Preview

15 Responses to “ “Measuring the mining investment cliff”

  1. Gunnamatta says:

    ‘Compounding the fundamentals of current subdued demand and excess capacity is an air of uncertainty. The international environment has been challenging and the Australian dollar
    is proving to be stubbornly high. The next Federal Election is approaching (scheduled for 14 September) which is adding to uncertainty. Against this backdrop of weak confidence
    commercial finance trended lower over recent months.’

    Any sign of news heads at big miners looking for an efficiency drive and pulling projects may play havoc here.

    • Explorer says:

      Near complete projects are likely to do everything they can to get production ramped up asap given the size of investment. A few months from production is not the time to begin an efficiency drive.

      As the rate of investment growth turns negative, newer projects still a few years from completion will be tempted to use the surplus construction phase labour to bargain down pay rates of existing labour forces and to negotiate away impediments to efficiency.

      • tobyoptimum says:

        This is spot on. Most companies delaying FID are citing the high cost of labour and construction.

        As things slow down and (hopefully) these costs reduce, some projects will achieve FID.

        Wages have in the past proved to be ‘sticky’, so its anyone’s guess where income and employment end up.

    • AK says:

      Reading the paper today that seems to be exactly their intention.

      They will now expect return on their investment soonish. I can’t wait to see if that has an effect on our CAD and dollar. No point counting exports if the money leaves the country straight after.

    • GSM says:

      “Any sign of news heads at big miners looking for an efficiency drive …”

      On efficiencies, it’s happening in all big 3 i/o producers in WA. Walsh, McKenzie and Powers will be/are on a mission to squeeze costs out of their operations. Seriously.

      On projects, it’s steady. For now.

  2. Black8 says:

    you’d think if something else was going to “fill the gap” later in the year, it would be obvious by now what it was going to be…

    • [email protected] says:

      SFA seems the thing at the moment.

    • PhilH says:

      I have the opposite view.

      The future is never obvious, so I have no idea what’s going to happen next. Could be good, could be bad.

  3. Explorer says:

    A search of the document show no results for any of:
    jobs
    employment
    unemployment.

    Much of capex is imported and results in improved productivity after installation and the learning curve period by reducing the number of employees required.

    Reduced capex will reduce our trade deficit/increase any trade surplus.

    Query the likely currency effect of large reductions in capex (probably still just lost among speculative and liquid investment flows).

    To me the big questions are how much will
    1. employment fall
    2. average wages fall
    3. unemployment rise
    and what plans government and treasury have for projects to soak up excessive surplus labour with productive, efficiency increasing, or necessary renewal, infrastructure projects.

    These are what are most likely to affect interest rates and house prices.

    When there is fullish and rising employment flatish to falling unemployment there is little risk of a housing crash.

    If there is a big increase in unemployment, all beets are off.

    • 3d1k says:

      I think you’ll find Explorer, those are the very concerns of many economists.

    • Gunnamatta says:

      well with average debt to disposable income at circa 145%, and with 175bp of rate cuts over 18 months not doing much to stoke demand (or as much as it has done in previous cycles) I would guess any ‘big’ rise in unemployment to take bets off may not need to be that big.

    • Alex Heyworth says:

      “all beets are off”

      Better buy some sugar futures.

  4. GSM says:

    We will see a sharp reduction in off site jobs and employment opportunities during the coming 12 months , that’s loccked in.

  5. China-Bob says:

    I dont know where to weigh in on Aust growth my gut feel is that we are in for a soft landing BUT i believe there is a lot of upside in the financial sector esp if the ASX remains strong.

    At the moment I’m in ye lone star state (Texas) There are clear green shoots everywhere one looks. Apartment construction is back in full swing, it seems that the low interest rates are coming with macro-prudential tightening, I spoke with several small business owners and got the same story from each, they would love to refinance their houses but the message is clear “3 years job history with W2′s” or NO loan. result is lots of development in high end apartments.

    Rents are sky-rocketing house rentals are over $100/sqft/month with 3% loans I’m real happy, and buying with both hands.

    I mention the US because I think the recessionary mindset will change real soon, so I expect this to flow through to Australia and keep it growing despite the structural weakening post mining boom.

    BTW for those interested it is great to be back in Texas. I love the can-do attitude and the complex layers of the economy here. There are at least three fully functional economies working within Texas. It is this depth that creates opportunities, small businessmen are looking at opportunities I would never consider, they are taking capital risks and enjoying the rewards.