Warning On Oz Mining Investment

This story features NATIONAL AUSTRALIA BANK LIMITED. For more info SHARE ANALYSIS: NAB

– Mining sector investment crucial for broader economy
– Mining investment to trend lower for next few years
– Possibility Australian economy is facing a “mining cliff”
– Cliff fall expected late 2014 to 2015

 

By Andrew Nelson

There’s always one big question that permanently hangs over the Australian market and it doesn’t matter if it is a time of feast, or a time of famine. The question is, of course: what’s the outlook for the mining sector? The sector does anything from influence to drive the Australian economy and investment markets, both directly and indirectly, so the question is always a relevant one.

We all know that costs have been a key focus for resources companies over the past year or more now, with steady work being done to cut costs down to the essentials to mitigate the effects of what has been an extended period of commodity price volatility and weakness.

Analysts at National Australia Bank ((NAB)) note that project/new work commencements have been trending down, admittedly from elevated levels, since 2009-10.  The ultimate size, duration and timing of the decline and hopefully the subsequent resurgence will be key economic markers for the domestic economy.

There are a few reasons the folks from NAB see the size and timing as being so important. First, non-mining sector investment won’t be able to fill the gap created by the accelerating decline in mining investment. Why? Because private investment outside the mining sector has been all but choked off by the sheer amount of investment in the mining sector. This means most other industries have been under severe funding pressure.

It is also unlikely there will be any meaningful contribution from the public sector. It seems both sides of the house have decided some sort of concocted surplus would better than actually putting the nation’s wealth to use in supporting the broader economy.

The timing of any further slowing in mining investment will also be a key driver of GDP forecasts, notes NAB. Mining and mining construction is a very labour intensive business, thus a mining investment decline will be important negative driver for employment numbers. Mining investment is also correlated with export capacity and while this would help offset some of the GDP impact, the bank sees little help for employment given the operational phase of most mining projects is much less labour-intensive than the construction phase.

That brings us to last week’s 2013-14 sector capex release. Long-term expectations are well down on last year’s read, with last year’s prediction now also looking too optimistic, in the bank’s view. While the numbers do show mining investment may rise, NAB suggests caution, noting the steady run of missed predictions in the past when it comes to guessing turning points. A small piece of evidence is last week’s numbers from the ABS, which show that mineral and petroleum exploration, including half-yearly expectations data, has started to ease.

The broker has conducted some econometric modelling, taking into account past commencements data for engineering/construction work in oil, gas, coal and other minerals. And after sifting through it all, NAB believes the outlook for commencements is worse than we’ve seen at any time over the past seven years outside of the GFC period.

The bank’s modelling predicts mining investment will be maintained at close to current levels until the end of 2013. The problem is, after that it falls away quite rapidly. 

In number terms, NAB sees a year on year average increase of 20% in mining investment in 2012-13, then a decline of 6% in 2013-14 and a quite serious fall of 21% in 2014-15. This would see mining investment pull back from an estimated peak of 8.5% of GDP in the last quarter of 2012, to 8.1% in the last quarter of 2013 and then to 6.0% by the last quarter of 2014. NAB notes that the fall through 2014, starting off in the 1Q, would be about the same as removing  more than 2 percentage points from GDP growth in that year. The bank has labelled this drop the “mining cliff”.

The trends can get a bit lumpy when you add in mega-projects, NAB pointing out the commencement of another mega LNG project in 2013 would push the cliff drop out by a year and a half or so, let’s say to late 2015. Still, declining commodity prices and rising costs will bring about a decline in mining investment in 2014, which NAB notes will be highly detrimental to growth and there will be no offset unless non-mining investment finds a way to fill the breach.
 

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