Commodities | Aug 10 2007
By Chris Shaw
The Australian mining sector has enjoyed a period of several years of strong growth and higher profits as the commodities cycle has turned in its favour but a National Australia Bank Quarterly Mining Survey suggests conditions are now stabilising and generating profits looks likely to become more of a challenge.
According to the bank’s minerals and energy economist Gerard Burg, firms in the industry now cite labour shortages as the greatest constraint to profit growth as the inability to find enough skilled workers is limiting output and so adding to cost pressures.
In other words, profitability to date has largely been achieved on the back of rising metal prices rather than increases in output.
That was fine when metal prices were continuing to rise, but with the exception of iron ore and coal in recent months there has been something of a flattening out of commodity prices. This is putting margins under pressure, especially when capital costs have also been moving higher.
As evidence Burg notes a number of respondents in the survey have indicated the rate of growth of labour and purchasing costs has exceeded price increases, meaning sales margins are likely to continue their recent downward trend.
With the bank’s survey showing industry participants expect the labour issue to remain for at least another 12 months the outlook is for mining profits to ease slightly, though they are expected to remain at historically high levels.
This lack of available labour and the resultant inability to lift output is forcing some companies to put off investment, though the expected additions to capacity in the sector remain high.
In summary, participants remain optimistic about the outlook for the industry and the sector should continue to be one of the best performers in the Australian economy.