The ANZ has produced the latest gloomy report into the approaching mining investment cliff in its semi-regular major projects report. This one is a doozy, more bearish than any before it:
MAJOR PROJECTS PIPELINE REVISED LOWER AGAIN: MINING AND RESOURCES INVESTMENT EXPECTED TO DECLINE SHARPLY FROM H2 2014
We have again revised lower the potential pipeline of major projects in Australia to AUD440bn as at March 2013 from AUD474bn in October 2012 and AUD498bn in July 2012. These downgrades reflect the additional cancellation and indefinite delay of a number of uncommitted projects, in the mining and resources sector. A considerable degree of uncertainty remains for currently uncommitted projects with only 60% (i.e. AUD270bn of the AUD440bn total) of the potential pipeline either committed or already under construction.
An estimated AUD75bn of mining projects have been removed from the potential investment pipeline over 2013-2016. However, these downgrades have been partially offset by the addition of some new projects to the pipeline, as well as cost upgrades to existing projects, particularly in the LNG sector. We now expect overall mining and infrastructure investment to peak around the middle of 2013, remain at a relatively high level until the end of 2013, before declining. We expect that investment in the mining and resources sector will decline particularly sharply over the second half of 2014 and 2015 and at a somewhat quicker pace than the RBA is currently anticipating, underlining the importance that other sectors of the economy strengthen over the next 12-18 months.
Investment in the energy sector remains elevated. There are currently seven mega-LNG projects under construction, with an estimated capital expenditure of AUD130bn between 2013 and 2016. However, we expect that investment in this sector will peak at the end of 2013 and decline thereafter. Furthermore, the possible next wave of LNG investment in Australia faces a variety of challenges related to escalating labour costs, the high Australian dollar and the potential competitive threat of LNG exports from the United States. As a result, there is now only a very small likelihood of further onshore greenfield LNG developments being commissioned. We expect that companies will instead prefer to expand existing LNG facilities as well as employ more cost effective FLNG technology for offshore LNG developments.
Investment in Western Australia is likely to decline more quickly than in Queensland, mostly due to the differing capital expenditure profiles for these states’ respective LNG projects.
Our bottom-up analysis of major projects jars somewhat with the most recent ABS capital expenditure survey. Firms’ first estimates of capital expenditure intentions for 2013-14 implied that investment in the mining and resources sector will continue to rise over the course of 2013-14. We remain somewhat sceptical of this result, given the large number of projects that have either been cancelled or deferred, and the shift in the focus of resource companies to controlling costs rather than pursuing expansion and growth opportunities. Furthermore, there has been a clear shift in the funding environment, with a number of projects finding greater difficulty in obtaining finance.
Note that in effect that is $30 billion dollar’s worth projects disappearing per year for the next three years. That’s 2% of GDP per annum for three years gone. My goodness, that is a lot. And that’s before we add any multipliers which the RBA so loves to do.
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Note as well the list of emerging major projects:
Just about everything on this list that is not a cost blowout is a government project. Get used to that.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
