A large segment of one of Western Australia’s great boom industries, mining plant hire, is now on its knees.
Over the last five years as the mining boom ramped up, renting mining equipment was a high margin lucrative business that attracted many entrants.
Mining and mining supply companies, both large and small, wanted equipment and they wanted it urgently. Just as they paid ludicrously high wages and signed labour agreements from hell, which were often negotiated by third parties (Miners must fess up on IR dirt, December 5) they also paid whatever the asking price for hiring mining equipment was.
The hiring company exposure to risk was compounded by the fact that many of the new players in the mining plant rental industry saw the vast number of projects that were in the pipeline and kept ordering more equipment. Much of that equipment has either recently arrived in WA or is close to arrival, and it requires funding.
The situation has changed dramatically in the last year. Australia is one of the most expensive places in the world to develop new mines and gas fields. Productivity has become a joke. Australia has priced itself out of the market, and while it is possible Gina Rinehart will proceed with Roy Hill, very few other new projects will proceed.
And many of the stronger mining and mining supply companies were not pleased at the exorbitant plant-hire rates they were being charged. Many decided it was more economic to buy their own equipment. So now not only have the new projects dried up, but existing customers are sending equipment back, which is joining the new equipment as it arrives on the wharves.
One of the largest plant hirers is the listed Emeco, which is soundly financed and also operates outside of Australia. Last month it reported severe competition in mining plant hiring and that one third of its Australian equipment was not being rented.
Emeco has around $800 million in plant investment of which almost $500 million is in Australia, so this is a large amount of idle plant. But the problems of smaller less well capitalised companies are much more severe.
The big accounting firms with large corporate problem businesses are flying people to Perth to help troubled plant hire companies. I do not know how many will go to the wall but it is not going to be a pretty site.
For Western Australia this is just the beginning. While there will always be a substantial mining production base, the state was geared for a construction operation that extended beyond the current gas and iron ore projects into the next decade.
Australia must regain competitiveness in mining and, as Resources Minister Martin Ferguson says at every opportunity, that task will involve the companies, the unions and the government. In my view it starts not with governments or unions but with chief executives regaining control of their businesses.