Australian Government statistics reveal that around $246bn (£156bn) in planned mining investments are now at risk, with nearly half that figure already effectively on ice or delayed. BHP, alone, has put the kibosh on expansion plans for its Olympic Dam copper mine in South Australia, together with the Peak Downs coking coal site, and the Port Hedland Outer Harbour construction – worth collectively in the region of $42bn.
China an unlikely saviour
Mining chiefs in the country will be hoping that Beijing replicates the $650bn stimulus package it put in place at the tail-end of 2008, but those hopes seem forlorn after a recent commentary on the matter was published in the state-controlled Xinhua News Agency. The piece stated that China’s long-term economic health would be imperilled by another move on this scale. Beijing has refrained from expanding the money supply, in favour of targeted tax cuts to small businesses and progressing infrastructure project approvals.
Indeed, Beijing’s main priority seems to have been on keeping a lid on food price inflation. It’s also unlikely that a policy initiative of this magnitude would be undertaken ahead of a leadership transition within China’s Communist Party, and the $174bn in infrastructure approvals announced recently by the National Development and Reform Commission already existed in the current five-year plan.
Unlikely benefits
Even $174bn of infrastructure projects in China is not enough to forestall the pain for Australia’s mining sector – at least in the short-term. But it’s worth musing on the possibility that the marked pull-back in investment could even have a beneficial impact on profitability within the sector.
One of the first casualties of the pull-back has been Australia’s big mining contractors. After nearly two decades of growth, they are being forced to contend with a severe contraction in demand, which, perversely, might actually cheer mine owners who have been saddled with an ever increasing unit cash-cost burden in recent times. Mining in Australia has become a prohibitively expensive business, with costs well in excess of the global average. The recent announcements by BHP and co will invariably reduce labour costs, which should eventually be reflected in unit profitability.
And given the scale of the postponements – assuming that’s all they are – it’s obvious that projected global tonnage for both iron ore and coal will need to be scaled down. Theoretically, this should mean that prices will become more reactive to any revival in demand from Asia or elsewhere.
Anxieties on the rise
So, falling unit costs and improved price fundamentals could conceivably follow a fall-away in capital expenditure within Australia’s mining sector. But the country’s economy won't remain unscathed. And, fanciful as it may seem, a possibility exists that a loss of faith in the country’s biggest export earner could trigger a banking crisis on a par with that of Spain’s.
In late August, Australia's resources minister, Martin Ferguson, let slip to an ABC radio journalist that “the resources boom is over.” The comment, though swiftly played down by Australia's PM, Julia Gillard, would have surprised few outside ‘the lucky country’, but it generated fevered debate domestically.
It’s understandable why Australians might become a little anxious given that their economy, almost uniquely, sailed serenely through the post-Lehman world without the slightest hint of a reversal. Real wages, credit expansion, real estate prices, and the Australian dollar remained in the ascendant, while at the same time speculation over a debt deflation spiral held sway in Threadneedle Street and beyond.
External credits mask structural problems
Admittedly, Canberra has been forced to run a budget deficit in each fiscal year since 2008, but the shortfall for the current year at $44.4bn, equates to just 3 per cent of GDP. This seems paltry by the standards of the UK, Ireland and other profligate European nations, but it should be remembered that Australia ran up deficits of this magnitude when its economy has been running at, or at least near, full tilt – in other words, the shortfall is actually a structural deficit. And most economists will tell you that this figure shouldn’t exceed 0.5 per cent of GDP.
The Australian economy has profited from a series of mining booms, dating back to the gold rush of the 1850s, but this latest one has been unprecedented in terms of duration. Good news on the face of it, but in reality it’s been a mixed blessing to a country where the collective psyche is given to complacency even under duress. Though Australia has made progress with regard to its high-tech industries, the resource boom has proved counter-productive to the diversification of the Australian economy, as the manufacturing and industrial base have obviously become less competitive due to a grossly overvalued Australian dollar.
