Investors grow wary of Australia’s mining industry; Study highlights the potential problems for the country’s economy

November 27, 2013 7:02 pm

Investors grow wary of Australia’s mining industry

By James Wilson in London

Investment committed to resources projects in Australia has fallen sharply, according to a government report that underscores the potential problems for the country’s economy as the influence of the mining industry fades. The value of spending committed to oil, gas and mining projects stood at $240bn in October compared with A$268bn ($243.2bn) previous six months, according to a twice yearly snapshot of the stock of investment by the Bureau of Resources and Energy Economics. The volume of new projects getting to the stage of final approval was at its lowest in a decade at A$1.7bn.The bureau said Australia was “seeing a transition from the investment phase of the resources boom to the production phase”. It said a number of projects were being delayed or altered as their backers “consider their options” in the face of softening prices and rising costs.

Mining groups have been particularly cautious about investment amid lower prices for some commodities, a less bullish outlook for demand and investor dissatisfaction at some past capital spending and acquisitions. Australia-based BHP Billiton, the world’s largest miner by market capitalisation, will spend about $16bn on capital projects and exploration this year, compared with close to $22bn last year.

The stock of committed projects is an important barometer given Australia’s reliance on the natural resources sector and its correlation with future production and exports. The bureau said the fall over six months was partly owing to the completion of a number of projects, which would lift exports and sustain production. But it admitted “challenges for investment in resources and energy projects” from softer commodity prices.

“Projections indicate that investment in the resources and energy sectors is likely to decline over the medium term,” it said.

Analysts at Barclays said the value of committed projects had fallen from 18 per cent of gross domestic product six months ago to 16 per cent.

“This is the first fall since 2010 and the largest drop since 1999 . . . mining investment is rolling over more quickly than the government had expected,” they said. “Mining investment should fall very sharply over the next few years as capex returns to normal.”

Some Australian business indicators have been optimistic in recent weeks but the economy is still seen as in need of rebalancing away from reliance on resources. In parallel with the easing of the mining boom, the Australian dollar has fallen about 12 per cent against the US dollar this year – although the Reserve Bank of Australia is still keen to see a further weakening to spur the economy. The RBA has lowered interest rates to a record low in order to stimulate non-mining parts of the economy.

Of the A$240bn of investment that the bureau said was committed, some $195bn is for LNG, gas and oil projects rather than mining.

The number of projects committed also fell, from 73 to 63, the bureau said. Projects described as committed are those that have regulatory approval and financing in place.