Westpac has released its regular capex report guidelines:
The ABS survey of business investment plans, the CAPEX survey, will provide some further guidance to growth prospects.
The June quarter CAPEX survey will be released on August 29, with responses received over July and August.
It is worth noting that the change of leadership of the ALP occurred prior to this, on June 26. The Federal Election was announced on August 4. The RBA lowered interest rates on August 6.
2013/14: Estimate 2
Estimate 2 of capex plans for 2013/14, released in the March quarter survey three months ago, was $156.5bn. We calculate that this implies a final outcome of $172bn. This is 8% above our estimate of the likely outcome for 2012/13 of around $159bn.
Our approach is to build up these estimates from the likely outcome for each of the three industries, based upon applying average realisation ratios (RR). In the case of mining, we applied the 3 year RR and for services and manufacturing we applied the 10 year RRs.
Estimate 2 by industry, and suggested outcomes, are:
Mining, $101.9bn, suggesting an outcome of $100.7bn, +8%;
Services, $46.2bn, suggesting an outcome of $61.9bn, +11%; and
Manufacturing, $8.4bn, suggesting an outcome of $9.1bn, –4%.
These calculations are particularly sensitive to the choice of RR. Given the current stage of the mining cycle there is a great deal of uncertainty surrounding the likely ultimate RR for the mining sector in the 2013/14 year.
Note that the RR applied to the 2nd estimate of services spending is +34%. That large RR highlights the uncertainty surrounding the initial estimates of investment by the services sectors. The RR moderates to +18% for the 3rd estimate.
By contrast, the RR applied to mining capex plans is –1% for the 2nd estimate, moderating to –14% for the 3rd estimate.
Scenarios for Est 3 of 2013/14
Here we present some scenarios for Estimate 3 of capex plans for 2013/14.This is based upon applying the 3yr RR to mining, and the 10yr RR to services and the 10yr RR to manufacturing.
Also, these calculations are based on our estimate of the likely outcome for 2012/13, of about $159bn. Any surprises to the 2012/13 result will impact these scenarios.
Scenario 1, 2013/14: – same % increase as Est 2 (i.e. +8%)
Est 3 of $179bn.
Implies $172bn, +8% on the (likely) outcome for 2012/13
Mining, +8%; services, +11%; manufacturing, –4%.Scenario 2, 2013/14: – a softer result
Est 3 of $169bn.
Implies $162bn, +2%
Mining, +2%; services, +3%; manufacturing, –6%.Scenario 3, 2013/14: – a weak result
Est 3 of $160bn.
Implies $154bn, –3%
Mining, –3%; services, –2%; manufacturing, –10%;Comment
We see the risks to Est 3, relative to Est 2, as skewed to the downside.Mining is increasingly focused on cost cutting and Est 2 for services appears to be overly optimistic. An update more in line with scenario 2 would not surprise and would arguably pose downside risks to the RBA’s growth expectations for 2014.
Also, as previously noted, these calculations are particularly sensitive to the choice of RR.
There is the risk that the RR for the mining sector is less favourable than the average 3yr RR, given the late stage of the current cycle. That is, mining investment will prove to be weaker than suggested by these calculations.
Note that the scenarios are calculated for the overall growth in investment. The mix of various industry groups could be quite different to the mixes set out in the scenarios. In particular we think the Reserve Bank will be most focussed on the estimate for growth in the non-mining sectors, particularly services. For example a weak overall number that was driven by a sharper than expected slowdown in mining but offset by a solid result for services would be viewed more positively than a sharply lower services number (against the base of +11% in Estimate 2) partially offset by a better than expected mining number.
