A mining bust charted

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Regular readers will know that for a about a year, basically since the 2011 iron ore crash, I have been maintaining a base case that the mining boom is going to be much shorter and less spectacular than commonly thought. More recently I have been posting some excellent ANZ charts that illustrate just how quickly the peak is approaching, as well as how swiftly investment may fall away. Over the weekend, the bank released a new report which nicely calibrated just how precipitous this investment cliff is. From the report:

As the project outlook deteriorates and the cost, completion and relative return risks rise, there is a global flight to quality, and resources and energy projects are being reassessed. Much of the increase in project risk is a function of the shortage of inputs, particularly skilled labour, which has contributed to sudden and unexpected project cost escalation.

Under these circumstances, investors have the motive and opportunity to be highly selective about the projects they choose to pursue. The track record of project proponents, the mix of particular commodities involved and the relative attractiveness of projects globally all bear on risk.

While most first-generation projects will be built, many projects plotted out on drawing boards in recent years will not come to fruition in the foreseeable future. In part, this is due to the reality that there simply would not be sufficient available capital or labour to complete them. Indeed, this report suggests that of the 950 projects identified as currently underway or proposed in Australia, up to two-expenditure between 2013-20 would fall from A$759 billion to A$450 billion, while the required construction and operational labour along the supply chain would drop from 310,000 roles to 160,000 roles.

The project pipelines in New South Wales, Victoria, South Australia, Tasmania and the Northern Territory are most fragile, while projects in Western Australia and Queensland are generally more robust.

And here are the key charts. First, the high, medium and low risk spending scenarois:

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Now, I know that the Australian Treasury would like us to believe that this is neither a boom nor a bust (ahem…cough) but to me it is both an extraordinary boom, one so vast that it completely blinded our policy-makers, and could be just as epic a bust in the making. Nearly all of this boom is in mining and related infrastructure and, as John Garnaut wrote this weekend in the SMH and MB has been arguing for a year or more, China is in for a long term readjustment that is going to put a question mark over all but the best projects.

This financial year, mining investment is projected to be in the vicinity of $120 billion. The highly attractive project pipeline in the ANZ study is $326 billion over eight years. That is a dreadful fall in growth from the sector. Some 4-5% of GDP up in smoke. The much touted greater export volumes, known as the second phase of the non-existent boom, will not be able to offset this even if they do deliver.

The medium scenario is better but not that much.

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Treasury is still describing this as a structural adjustment to a greater share for mining in the economy. It needs to get over it, just like the RBA, and fast.

An z Insight Issue 2 October 2012

About the author
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.