Australia: Resource slow-down

When China's economy goes belly-up so too will Australia and New Zealand. Watch this space.

 Australia's Resource Boom Is Losing Steam

Australia's multibillion-dollar spending boom on resources is losing momentum unexpectedly rapidly, with several projects on hold or canceled as commodity prices fall and banks become less willing to lend.

WSJ,

20 August, 2012

From copper mines in tropical Queensland state to the big iron-ore pits in the country's arid west, mining companies are laying off workers and idling equipment until metal prices rise sufficiently.

The cutbacks are largely in response to China, which needs vast amounts of coal for its power stations and iron ore for the steel frames in its high-rise buildings, but where demand for commodities has been slowing. Iron-ore prices, which hit a record last year, are now at a 2½-year low, and aluminum and nickel prices also are holding near multi-year lows.

Australia's government is forecasting a 500 billion Australian dollars (US$522 billion) pipeline of mining and resources projects, spending that it hopes will ensure the economy avoids the relative stagnation experienced in Europe and the U.S. While it doesn't specify a time period, most of the spending on projects listed on the Bureau of Resources and Energy Economics's website is expected to happen between 2012 and 2017

Already, this spending boom has helped pushed the Australian dollar above parity versus the U.S. dollar. But the Australian dollar's rise has heaped pressure on industries from tourism to education, which would need to cushion the economy if mining investment slows.

In a sign the spending slowdown is starting to worry policy makers, the Reserve Bank of Australia said this month it expects investment in resources to peak in the fiscal year that ends June 30, 2014—earlier than it previously thought.

"The maximum spending is around the end of next year," Guy Debelle, the bank's assistant governor for financial markets, said last week. "So it would be surprising if you saw even more after that."

Analysts think that not all of the projects in the government's A$500 billion pipeline will happen without a major recovery in commodity prices or an increased willingness by banks to lend. That is because around half of the money is tied to projects that still need financing or the final go-ahead from regulators or company bosses.

"That part of the pipeline will be going through some very serious reconsideration at this time," said Mike Elliott, leader of Ernst & Young's global mining and metals team.

Already, some flagship projects included in the government's forecast have landed on the scrap heap. In May, the Queensland state government said it won't proceed with a planned US$9 billion expansion of Abbot Point, Australia's most northerly coal port.

Analysts also think several other big projects, such as BHP Billiton Ltd.'s BHP.AU -0.36% near-$30 billion expansion of the Olympic Dam copper and uranium mine in South Australia and Xstrata XTA.LN +2.05% PLC's $7 billion Wandoan coal development in Queensland could be delayed.

A BHP spokeswoman said no decision has been made on Olympic Dam.

"Against a backdrop of increasing costs and falling commodity prices, we continue to focus on reducing our overheads, operating costs and nonessential expenditures," she said.

Xstrata is waiting for regulators to grant it a mining license for Wandoan.

U.K.-based consultancy Wood Mackenzie estimates only A$284 billion will be spent on the mining and energy projects listed by Bureau of Resources and Energy Economics between this year and 2017.

Even this figure masks the underlying challenge facing the industry, as around 70% is tied to huge gas-export projects along Australia's coastline that are underpinned by binding sales contracts with Asian utilities lasting two decades or more. Mining projects are more vulnerable, as many don't have customers in place and their profitability depends on prices recovering.

"The risk is on the downside, and more conservative shareholder sentiment will result in the shelving of all but very compelling projects," said Liam Twigger, managing director of Perth-based corporate advisor PCF Capital Group.

The scale of recent investment, particularly in the liquefied natural gas sector, will cushion the impact on the economy and give companies breathing space to see if commodity prices rebound, debt markets open wider, and the global outlook improves.

But each deferral of a project has repercussions in near-term spending and jobs, which may be critical for a government that has pinned hopes for a return to a balanced budget next year on a new tax on iron-ore and coal profits and a levy on carbon emissions.

Smaller companies are already taking a more conservative stance. Ivanhoe Australia Ltd., IVA.AU -3.49% a unit of Rio Tinto RIO.LN +2.08% PLC, has cut up to 50 workers this year as commodity prices fell, and has said it will defer an open-pit mine targeting copper and gold in Queensland.

Perth-based mining company Aquila Resources Ltd. AQA.AU +1.75% is reducing spending on its A$5.8 billion iron-ore project in Western Australia to a minimum. It and closely held U.S. partner AMCI aim to conserve funding given changes in the operating environment, including a drop in prices for the steelmaking ingredient. The companies have already spent about A$400 million and are seeking to secure funding from China, but need a government decision on a new port that would export their ore.

More serious problems have hit zinc and copper miner Kagara Ltd., which has called in administrators because of a cash-flow crisis.

"Given cost blow-outs, delays and a tough macro market, the willingness of the market to provide capital to all projects has diminished and earlier-stage and high-capital expenditure projects are definitely going to find it harder," said Tim Day, an analyst at UBS. "Saying this, quality projects, no matter where in the development cycle, will always attract finance."

“Policy makers are "dangerously complacent" about the risk now arrayed against the 1.4 trillion Australian dollar economy”

Ditto, New Zealand

Deutsche Bank Warns of Australian Recession Risk

One of Europe's biggest banks on Tuesday warned against the growing risk of recession in Australia in 2013, as prices for commodities such as iron ore and coal spiral lower.

WSJ,

21 August, 2012

The warning by Deutsche Bank DBK.XE +5.09% comes amid rising concern that Australia's mining investment boom, which has insulated the commodity-rich economy from a global slowdown, is waning, leading to mine expansions being scaled back and mounting job losses.

Policy makers are "dangerously complacent" about the risk now arrayed against the 1.4 trillion Australian dollar (US$1.5 trillion) economy, which relies heavily on prices paid for its biggest exports—iron ore, coal and gas—for its prosperity.

Australia's terms or trade, or the difference between what the country is paid for exports and what it pays for imports, may collapse by as much as 15% in 2012, said Adam Boyton, Deutsche Bank chief economist in Australia.

"Over the past 50 years such declines in the terms of trade have been seen only five times. In three out of those five instances the economy entered recession," he said, adding that there was "overconfidence that the investment pipeline is locked in."

An investment pipeline valued at close to A$500 billion is expected support economic growth over coming years, but cracks are increasingly showing in the country's mining industry.

Prices for exports of coal and iron ore have slipped to multiyear lows as growth has cooled in China, the country's biggest trading partner.

Problems for Australia's exporters are being deepened by a soaring Australian dollar, which is near 30-year highs as the world's central banks seek a haven for currency reserves in the country's triple-A-rated bonds. Calls have gone out for the Reserve Bank of Australia to weaken the currency either through interest-rate cuts or direct market intervention.

Mr. Boyton said a sharp drop in the terms of trade would have immediate consequences for the mining investment pipeline.

"History would counsel some caution on the investment outlook. Indeed, an average response to a circa 15% decline in the terms of trade would see business investment falling in year over year terms by early 2013," Mr. Boyton added.

The assessment stands in contrast to the upbeat one by the RBA, which earlier this month raised its forecast for economic growth in 2012 to 3.5% from 3.0%.

With confidence flagging, RBA Gov. Glenn Stevens has called on business and consumers to start to seeing Australia's economic position as a "glass half full."

The RBA said Tuesday it expected the mining investment boom to peak during 2013-14, but added the timing of the peak was uncertain.

Also Tuesday, corporate insolvencies hit a record in the year to June 30, according to the Australian Securities and Investment Commission. Mining states are among the worst hit, it said.

"We see one of the mining boom states, Queensland, showing one of the most dramatic increases in corporate failures," ASIC said. "Western Australia's financial year company failure figure is also the highest on record for that state."