The next mining boom is a bust


You never know who you will meet at a wedding. I spent Saturday night sipping beers with an oil and gas executive (who wished to remain nameless). His views on the mining boom were no different to my own. But the perspective was less macroeconomic and more operational. Basically, he reasoned, that between the dollar and rising input costs, the current LNG pipeline was a total fiction, that existing projects will be completed but on a longer time-frame than currently assumed and that all of the current projects under construction were going to weigh heavily on the firm’s return on equity for a long, long time. The next phase of the boom, in his view, was one that will prove quite costly to rest of us, which I will come back to.

His firm had significant maritime reserves but has effectively shelved all plans to develop them. They were looking instead at West Africa, the US and the Middle East, where returns were far more attractive.

To summarise, he felt the peak in planned mining investment was yesterday’s news, that the actual peak in capital spending was right around the corner, though the sales boom would continue.


Turning to today’s national media we have an ongoing debate around these various peaks. At The Australian, David Uren leaks today’s updated Access Economics mining sector report:

COST blowouts are now the only source of growth in the resource pipeline, with no new projects being commissioned in the past three months while the number of deferrals and cancellations has risen.

…The result is a change in the profile of the resource investment boom. The Reserve Bank expects the peak to come next year, not in 2014 or 2015 as was expected until mid-2012.

…The Deloitte Access Economics quarterly review of investment projects shows that for the first time since the boom began, there were no new projects in the resource sector in the September quarter, while projects worth $2.9bn were completed.

Despite the cancellation of projects, the total value of the resource projects on the firm’s database (including those in planning) rose by $17.9bn due to cost blowouts. The review says these reflect firmer cost estimates as detailed feasibility studies are undertaken, and changes in scope.

Deloitte Access puts the total value of resource projects under construction at $221.7bn, dominated by the $192bn in LNG projects. There is a further $22.12bn firmly committed.

It estimates that the investment peak will occur in 2014.

…The Bureau of Resources and Energy Economics will release its twice-yearly assessment of projects in two weeks. Its director, Quentin Grafton, has foreshadowed that it will include a rise in the number and value of projects from the April assessment.

Uren goes on to say that much will depend upon any rebound in Chinese growth. But according to my erstwhile drunken source, who remained bullish on China, growth is now only a marginal driver in decisions. Until Australia’s real exchange rate corrects significantly, we’re priced out.


And that means the next mining boom is not in expansion, it’s in contraction. That is, less staff, lower and more productivity aimed capex, and automation out the wazoo. Which is where we find the AFR today:

BHP Billiton’s new iron ore chief, Jimmy Wilson, has targeted more job cuts and a boost in labour prod­uctivity to revitalise its iron ore ­business now that boom-time “scarcity pricing” has passed.

…“We always look at ratios between folk that operate things or maintain things that get operated – those are the folk that actually drive the value in the business, our business,” Mr Wilson said. “The rest of us work for them. So what you don’t want is too many folk that are not part of that direct value addition in the business. So we are focusing on managing that number down.”

The leading edge of this, as we’ve forecast at Macro Investor for some months, is in the mining services sector. An SMH story shows that the pain is already obvious:


PROJECT cancellations and profit downgrades are mounting as the mining services sector confronts its post-boom future.

In announcements late on Friday, two groups servicing the mining sector said contracts with large mining companies, including Rio Tinto, had been cancelled or were not expected to be renewed, while Orica revealed a $367 million write-down.

Diploma Group said it would not proceed with 244 single rooms for fly-in-fly-out Rio Tinto workers near Tom Price in the Pilbara, while equipment leasing group Emeco said hiring rates in Australia were much lower than expected.

Emeco has been looking offshore, and has shipped a fleet of trucks to Chile, where copper mining is ”robust” and growing.

Orica’s decision to write down the value of its Minova equipment division will slash its profit to $400 million, well down from analyst forecasts of about $650 million for the year. Orica’s results for the year to September 30 are due out on Monday morning, while explosives manufacturer Incitec Pivot releases its results on Tuesday.

…Diploma Group’s $44 million contract to build the rooms for Rio near Tom Price was its first with Rio and was announced in July this year. Just four months later the housing project is now ”non-essential” to Rio’s expansion plans.

Emeco said that only 66 per cent of its equipment in Australia was in use at present, down from 76 per cent in August. This is far below the ”average utilisation of 91 per cent” in the first half of 2011-12.

Specifically, two goldmines in Western Australia did not renew contracts and iron ore miners were unlikely to re-hire equipment until early 2013. Emeco does not expect several coalminers in New South Wales and Queensland to renew their contracts.

For a nation hooked on the easy income gains of a price and investment boom this will be a tough adjustment. There is hope in the growth in productivity that will flow. But it will still be painful. With the RBA determined to keep a lid on housing, the real exchange rate can only slowly deflate, and this baby is a bust.

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.