How Australia is Sliding Down the Other Side of the Mining Boom

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That deafening silence you hear is the end of the Australian mining boom. Yesterday, the Bureau of Resources and Energy Economics (BREE) released their bi-annual report on ‘Resources and Energy Major Projects’.

BREE reports that over the past 12 months around $150 billion of projects have been delayed, cancelled or reassessed. Investment activity is still very high, but it’s the future pipeline of work that is a worry.

Below is a chart from the BREE report showing the current, likely, and possible investment pipeline for committed projects through to 2018. The ‘current’ projection is not the one to focus on, as it doesn’t take into account projects that will flow through from the ‘publically announced’ and ‘feasibility’ stage. The ‘likely’ scenario is probably the most realistic. Still, it doesn’t look too good.

Now compare the above chart to the one below, which shows the value of committed projects over the past 10 years…


In other words, by 2018 we’ll be back to 2003 levels in terms of project investment. Actually, it will be much worse than that, because the dollars are nominal — that is, they don’t take into account price inflation in the sector.

Join these two charts together and you get a classic boom and bust situation.

So what does this mean for the Australian economy?

Well, the first point to note is that the decade long investment boom will produce an income stream in the years to come via increased exports. But the investment decisions were made at a time when the outlook for commodity prices was very different. That means some of this investment will not be as productive as initially thought. In other words, the return on investment will be lower than first expected.

And just as Australia’s mining boom ends, Australia has to deal with China having a reduced appetite for our commodities. That will have an effect on our terms of trade, which will have an effect on national income, which will have an effect on the property market and the banks.

We’ve been making that argument to Sound Money. Sound Investments subscribers for months now. These things take time to flow through the economy. And when you get the Reserve Bank of Australia cutting interest rates and a knee-jerk reaction that lower rates will surely be good for stocks/housing/consumers, the underlying trend gets lost in the hype.

We said that rising stock prices and the apparent ‘recovery’ in housing was simply a trap and not to fall into it. It’s certainly looking that way at the moment. The Australian mining boom has underpinned our economic growth for a decade. It has supported capital inflows to sustain our standard of living and boosted incomes enough to sustain our world-class property boom for longer than most predicted.

But now we’re sliding down the other side…

Here’s another way of looking at it. The chart below shows business investment components as a share of nominal GDP. As you can see engineering is around 7.5%, up from around 1% before the boom kicked off. That’s nearly all mining boom related.


As engineering’s share of GDP turns down, what will take its place? That’s the question we need to ask because if nothing steps up to replace it, Australia could face its first recession in more than two decades. The consumer looks fragile, and it’s hard to believe we might be on the cusp of another leg up in housing.

Right now we think the odds of a recession are higher than they have been for many years. It will be interesting to see how defensive the banks are in such a scenario.

Regards,
Greg Canavan
for The Daily Reckoning Australia

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From the Archives…

Multinationals vs. the Nation State
17-05-13 – Sam Volkering

The Federal Reserve Will Panic and Climb Even Higher
16-05-13 – Bill Bonner

Survival of the Most Capital Efficient
15-05-13 ­– Dan Denning

New Australian Home Buyers Aren’t Convinced
14-05-13 – Dan Denning

What Happens When Everyone in the World has Zero Interest Rates?
13-05-13 – Dan Denning

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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Robert
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I have long held concerns about our banks. Could you write more about their viability in a downturn, their exposure to credit default swaps, their real Tier 1 cap ratios, their influence on APRA’s supervision?

Thanks
Robert

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