Mining Sector To Keep Australian Economy From Contracting

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By Chris Shaw

While weaker economic data in recent weeks has increased the prospect of the Australian economy sliding into recession BIS Shrapnel suggests such an outcome is unlikely as strength in the mining sector will be enough to keep economic growth on the positive side of the ledger.

The group’s “Mining in Australia, 2008-2023” report estimates high levels of mining investment combined with production increases will be enough to offset higher costs and interest rates and so help deliver GDP growth of 2.5-4.5% per annum over the next five years.

The group’s Infrastructure and Mining Unit senior manager Adrian Hart points out the current level of income inflows is financing new investment in capacity at the same time as it is delivering funds to the government, while in later years the increases in production will offset weaker commodity prices. This should be enough to see Australia enjoy a positive trade balance in both FY09 and FY10, the first time surpluses have been recorded since 2002.

Those commodities exposed to energy and steel appear best placed in Hart’s view, with China’s industrialisation driving demand for iron ore and coal and record energy prices supportive for the oil and gas sectors. All of these sectors have a number of new projects in the works, supporting the group’s view mining investment will stay at solid levels in coming years.

Aside from the steel and energy related commodities Hart expects commodity prices will weaken going forward as production should increase significantly over the next few years, so lifting stocks from recent critically low levels. Prices are forecast to bottom in 2010 or 2011, with the largest falls expected in nickel, zinc, lead and copper. But even allowing for weakness in coming years BIS Shrapnel expects prices will remain at what are historically elevated levels as demand should continue to grow at a solid pace.

On the group’s numbers total mining investment rose 22% in FY08 to $41.5 billion, helped by a 45% increase in exploration spending. This puts the level of investment at four times the level of FY01 and Hart expects investment will remain at historically high levels even allowing for what should be a mild cyclical downturn from FY10.

The oil and gas sector is predicted to have the highest level of investment over the next five to 10 years, helped in large part by demand for LNG out of Asia and the west coast of the USA. Iron ore and nickel investment should also remain high as demand for steel and stainless steel is also expected to remain strong.

Investment in copper will also increase significantly from 2010 as BHP Billiton ((BHP)) expands its Olympic Dam project, but the group expects investment levels in gold, coal and other base metals will ease from current record levels from FY10.

The group acknowledges some risks to its outlook, those on the downside including higher input costs and an ongoing shortage of skilled labour. Supply disruptions such as the recent Varanus Island explosion could also impact on the sector, though as Hart notes such risks will tend to be price supportive and so extend the cycle of investment in the sector.

A more serious problem would be any significant downturn in the Chinese economy as this would impact on both prices and the level of investment given China accounts for a large part of the growth in demand for commodities generally. Such an outcome is not likely though in the group’s view as it sees the outlook for the Chinese economy as solid.

On a more industry specific note the group cautions on the outlook for the thermal coal sector in Australia, particularly if an emission trading scheme is implemented. Hart points out thermal coal demand is most at risk if cleaner forms of energy generation are promoted under such a scheme, which would likely see new investment in thermal coal projects delayed or replaced by investment in the likes of uranium and gas.

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