Australian Mining Projects Being Shelved At An Alarming Rate

We wrote not long ago about the robust state of the Australian economy.

In spite of a strong Aussie dollar causing problems for exporters and the drop in metals prices taking the shine off mining investments, we saw long-term strength in the country’s LNG sector as a compensating factor, maintaining high inward investment and robust overall GDP growth.

But of course, saying on average the economy is doing well is a bit like saying a man with his head in the oven and his feet in the freezer is on average at a middling temperature.

Within Australia’s commodities sector there are winners and losers, so while we come to terms with what some are suggesting is a new normal of slower, more sustainable Asian growth, let’s focus more specifically on what is happening to the metals sector of the region’s largest supplier.

A Reuters report points to a sudden deterioration in employment in the Australian mining sector as evidence that miners are reacting rapidly to the drop in demand from China.

Government data out last Thursday covering the three months to August showed jobs in the mining sector fell by a net 4,600, following an increase of 25,500 in the three months to May.

Total employment in the industry was still up 44,600 on the same period last year, but it was the first quarterly drop since mid-2009 and suggests a peak may have been reached and the trend rapidly reversed.

Even though mining makes up only 2 percent of the workforce, they are highly paid jobs and have been rising, up 133,000 since 2007, while those in manufacturing had been falling, down 65,000 over the same period.

Observers fear the industry is at a tipping point, with project cancellations or delays seen so far being only the tip of an iceberg that has yet to reveal itself as projects are reviewed by lenders fearful at the collapse in metals prices.

Among those already delayed are BHP’s Olympic Dam copper mine expansion, its Outer Harbour iron ore expansion, and its Peak Downs coking coal expansion, together worth over $40 billion.

Meanwhile Fortescue Metals Group, which had planned to triple iron ore output to 155 million tons a year by mid-2013, did an about turn last week, delaying nearly half that expansion to save $1.6 billion.

Resources Minister Martin Ferguson told reporters he expected further announcements. Projects at risk include 33 iron ore programs with a combined capacity of 465 million tons, equivalent to about a year of Australia’s output, and 73 coal projects with a combined capacity of 522 million tons, 50 percent more than produced in 2011.

The minster recognized that LNG projects would to some extent make up for the sharp drop in inward investment in the mining sector; what has caught the industry and government by surprise is the speed of the change.

The fall in mining investment cannot be made up overnight by an increase in the energy sector. In the meantime, many are praying the current bounce in prices forms a new upward trend, but investors do not appear to be banking on it.

by Stuart Burns