From the AFR, Ross Garnaut is in China where he sees:
China is in the middle of an economic transformation that will result in less infrastructure investment and much lower growth in imports of iron ore, other metals and energy, he says.
Australian policymakers need to make an “immense adjustment” if the country is to avoid a deep recession brought on by the end of the China resources boom, according to prominent economist Ross Garnaut.
“It’s going to be very tough and Australia will only get through that with a radically lower real exchange rate…Monetary policy is critical to this…The RBA needs to look through that component of inflation and set monetary policy independently of the effects of devaluation.
He continued in reference to non-mining tradables:
You can’t fatten the pig on market day. There are long lead times for investment in these industries…If we want strong export growth in four, five or 10 years’ time, the investment has to come now. Australia has enjoyed 22 years of steady expansion of economic output without recession.
“The only way of avoiding a deep recession is for there to be a large real depreciation of the exchange rate supported by nominal government expenditure restraint and income restraint across the board, and an uninhibited focus on productivity reform.”
One wonders why some of this wisdom isn’t included in the Budget forecasts, which remain very aggressive about an enduring high terms of trade. BHP and RIO are alert even if Canberra is not.
BHP’s plans to wind-back mining capital expenditures in favour of returning cash to shareholders. From the Wall Street Journal (my emphasis):
The new chief executive of BHP Billiton has pledged to put the brakes on profligate investment over the next few years, following concerns over meager returns from big projects…
[New BHP Chief] Andrew Mackenzie said the world’s biggest mining company by market capitalization would scale back capital expenditure “quite significantly” in the coming years from a peak of more than $22 billion, which the company expects for the fiscal year ending in June.
The decision comes after big shareholders such as BlackRock Inc. and others have questioned the massive investments mining companies continue making to expand capacity and bring more iron ore and other minerals to the market even as prices have fallen.
…capital and exploration spending is set to decline to about $18 billion next fiscal year and fall further thereafter as the company targets improved returns from new developments…
BHP has invested tens of billions of dollars to expand its mining and energy businesses in recent years, and Mr. Mackenzie said 80% of the major projects still under way, such as the expansion of iron ore capacity in Australia’s western Pilbara, will be complete by mid-2014.
So the lion’s share of BHP’s mining expansion projects will finish-up this time next year, with a rapidly shriveling spend.
Rio Tinto also delivered sobering news overnight, suggesting that it might wind-back its planned $US5 billion Pilbara iron ore expansion project and flagged further cost-cutting measures. From the AFR:
Rio Tinto chief executive Sam Walsh has raised the prospect of slowing a $US5 billion Pilbara iron ore mine expansion following concerns from shareholders the miner was taking too aggressive an approach to expansion.
In a presentation at the Bank of America Merrill Lynch Global Metals, Mining & Steel conference in Barcelona on Tuesday, Mr Walsh appeared to soften his rhetoric when discussing long-held plans to boost iron ore production to 360 million tonnes a year by 2015.
“We have multiple pathways on the 360 mines,” Mr Walsh said. “The decisions will be made in late 2013 and in early 2014. Depending on the market, we could choose to develop new mines to quickly deliver tonnes. Or we could conserve cash and fill some capacity with incremental tonnes from existing mines at much lower capital intensity.”
With mining expansion projects now seemingly dropping like flies, the orderly decline in mining-related capex forecast by the Reserve Bank and ABS looks far too confident, with adverse implications for employment, incomes, growth, and government finances.
