Behind the latest capital expenditure figures lies the key to a significant change in Australian direction. Not surprisingly, the poor currency traders are just a little confused.
The Australia Bureau of Statistics shows that mining capital expenditure in 2013-14 is holding up very well (Australian dollar lifts in the wake of capex data, February 28). The statistician’s mathematics are right but they don’t reveal the drama behind the figures.
By 2013-14 a lot of the momentum in the coal expansions will have been exhausted but it is being replaced by the fact that the LNG capital train does not start to fall until 2014-15 and does not halt until 2015-16. For example the largest project, Gorgon, is not due for completion until late 2014 and will almost certainly extend into 2015.
In 2013-14 the lower money set to be spent on coal is being largely offset by the fact that the costs of the LNG projects have blown out by about $15 billion.
And when the projects get close to completion those that are badly managed and those that have done bad deals with unions will find some big worker payouts will be required to allow the projects to be completed.
WA Premier Colin Barnett wants the Browse project to put its facilities in Western Australia, not realising that the industrial relations deals that have been done in that state make such an investment totally uneconomic.
So in a strange way the cost blowout which holds up current capital expenditure is the driver of what will be an enormous slump in mineral spending. What looks ‘good’ is ‘bad’.
At the moment Australian non-mining businesses are holding back capital expenditure. But if they were to keep that up for much longer they would begin to jeopardise their future. So with the Coalition looking like a winner, interest rates low and banks bashing at the doors of sound businesses wanting to lend them money, we are going to see a substantial capital investment recovery in non-mining Australia in calendar 2014. For a short time the cost-bloated LNG projects will overlap with the resurgence in non-mining capex.
Meanwhile, while non-mining capital expenditure may rise, it will get nowhere near the current mining level.
And large miners are changing executives as they prepare for a new era of lower capital expenditure. We have talked about BHP (Mackenzie's clean break is bigger than you think, February 25) but Chris Lynch’s appointment as Rio Tinto chief financial officer means Rio Tinto is going to have a much sounder balance sheet and less capital expenditure – particularly in Australia, where our construction costs are too high (A razor man for Walsh's Rio, February 28).