Mining canaries dropping like flies

ScreenHunter_12 May. 01 18.48

By Leith van Onselen

Earlier this month, I noted how falling mining equipment sales could be a harbinger of a sharper than expected reduction in mining capex. Then earlier this week, mining services contractors, Coffey and UGL, cut their earnings guidance for 2013 and announced plans to cut jobs amid a raft of project delays and cancellations in the mining industry.

Today, Worley Parson’s has provided yet another indication of a sharp slowdown in mining capex, lowering its profit guidance following lower demand for resources infrastructure in Western Australia. From the AFR:

WorleyParsons has become the latest victim of the resources slump, warning “softening demand for resources infrastructure” will hit 2013 profits…

“The West Australian business has been impacted by the softening of demand for resource infrastructure as clients defer major projects and implement cost management initiatives,” the company said…

WorleyParsons’ profit downgrade comes as increasing number of contractors and engineering firms caution they are being hit hard by the resources downturn, with UGL, Sedgman Resources and Coffey International all issuing profit warnings this week.

Contractors are being hurt as miners cut back on costs…

UGL CEO Richard Leupen has called on state governments to find ways of boosting private funding for infrastructure projects to compensate for the decline in mining projects.

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Leith van Onselen
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    • I guess now they’ll have to learn how to compete for a slice of a shrinking pie instead.

      • They cant compete as they are so top heavy and “safety focused.” If you have ever worked on a Woodside/BHP job you would know that the conditions placed on a contractor are so onerous that you have to charge through the nose due to the risks involved. Its a continuous downward spiral and management is already more focused on safety then getting the actual job done.

      • davez,

        I agree, but the quality of their work is rather sus in my experience and their strategy for charging is not unlike that of lawyers. Over the top.

    • These types of firms are the engineering equivalent of the top tier advisory firms.

      There is just an unbelievable amount of fat in the charge rates and the management structures – it amazes me that corporates still suck up the fees. After many years of working in this culture I put it down to two factors:

      1. Legacy brand quality that no longer always matches the quality of the current product but has a great sales strength on risk/history (in actual fact a great deal of work is now done by the lowest paid workers in the institution – often grads so the myth of the brand/price and the quality don’t necessarily line up);

      2. Very strong sales and mutual benefit/obligation cultures (ie the corporate manger gets tickets to the grand prix, racing, tennis etc.)

      It’s a bit more complex than this obviously as it relates to more specialist areas and lack of competition – but generally there are millions spent each year by corporates on simplistic advice prepared and finalised by guys and gals with less than 3yrs experience and given a cursory once over by a busy principal/partner.

      At the heart of it, is the same problem we face with the banks. There is greater executive than shareholder control of the organisation, so executives make decisions that partly benefit the organisation and mostly benefit themselves.

      It is almost impossible to sell top tier advisory services to SME (even big ones) on the same methods that are used for corporates – and this is because the owner is the executive and the mutual benefit/obligation tools/tricks don’t work and they can spot shoddy/expensive a mile away.

    • Forrest GumpMEMBER

      Guys, Please!!

      I’m at one of these companies and can assure you the costs, I agree are expensive, BUT in order to comply with ISO standards, BHP/RIO/FMG/Roy Hill requirements and a raft of insurances etc, AND as you have noted, Safety compliance, you can understand the costs need to thud cover these processes.

      Yes you can get cheaper engineering services locally and OS, but then the design cannot be signed off/ratified and certified by engineers and hence that has legal, insurance and financial implications.

      Try getting an approval for bankabale feasibility for a mine site that has been engineered by “Dad and Dave’s backyard engineering services” and see how far you get.

      Oh, and then attempt to get an environmental sign off when you don’t have any certified Enviro Scientists or your company has no certification. (All of which costs $$)

      Good luck with that!

  1. “UGL CEO Richard Leupen has called on state governments to find ways of boosting private funding for infrastructure projects to compensate for the decline in mining projects.”

    Ya gotta luv that – the engineering sector pleading for State Aid.

    • Well we do need infrastructure investment. Just as well we’re coming off a once in a century boost to national income and Government coffers.

      Oh, hang on…

    • Forrest GumpMEMBER

      Whats the difference? The HIA and the real estate leaches are always hounding the government for FHBG and tax cuts for the building industry.

      Im surprised that Mc Donalds have not asked the government to subsidize the cost of a big Mac so the public can afford to eat healthy food.

  2. Worleys were recently booted off the lucrative Roy Hill Project.

    The engineering sectior is in the doldrums, waves of engineers heading back overseas.

  3. Don’t worry, I’m sure that this will have no flow-on effect over the medium term to Perth’s $500,000+ median house price (WA has run out of land, you see), or WA state government revenues.

    Everything’s fantastic; house prices to the moon!

    • innocent bystanderMEMBER

      don’t worry, Barnett and Buswell have got the msg – they have already cut back on recent election promises like rail infrastructure – but remain committed to monuments like the deep water port for tourists in the Swan River and the colin-seum to stop the riff raff rioting

    • Absolutely. There’s never been a better time to buy. Property will never lose value. You can hock yourself to the eyeballs and let the negative gearing (aka other taxpaying schmucks) take care of the losses.

  4. ALS (formerly ALQ) down by almost 20% and looks like it’s heading more down.. more pain for me.. 🙁