Bureau signals end of boom in commodities
The Bureau of Resources and Energy Economics revealed a sharp rise in the number of projects suffering cost blowouts or deferrals, and a steep decline in exploration spending. The findings - released on the same day investment bank Citi declared the "commodities supercycle" would end this year - will fuel perceptions the resources boom is over.
In its latest six-monthly report on major projects, the bureau estimated Australia had missed out on $149 billion worth of spending on resources projects over the past year, as a result of 18 big projects being deferred or cancelled.
The sum is likely to be conservative, given that many of the 18 projects were listed with values far below what had recently been discussed in the market.
The Browse LNG project was judged by the bureau to be worth $36 billion in deferred spending.
However, those close to the project believe it was set to cost closer to $80 billion before the operator, Woodside, decided to investigate other options.
For projects going ahead, the bureau calculated that $28.5 billion worth of cost blowouts had been endured over the same period, with Chevron's Gorgon project heading the list.
Those blowouts accounted for about 11 per cent of the $268 billion committed to resources projects in Australia.
This means the peak of investment in the sector would have been last year had the cost blowouts not inflated this year's figures.
In declaring this year to be the peak of the investment cycle, the bureau forecast committed investment to fall by $8 billion next year and $63 billion in 2015. By 2017, committed investment is tipped to be back at 2007 levels - about $60 billion.
There was further grim news in the bureau's account of exploration spending, which was shown to be sharply lower long before the Gillard government imposed tighter tax rules on exploration last week.
High-risk "greenfield" exploration spending in the December quarter was $264 million, down by 16 per cent from the September quarter and 27 per cent from the June quarter.
"This year should provide full affirmation that the commodity supercycle has finally ended and should usher in the first 'normal' year in over a decade in which, broadly, commodity prices end the year lower than when the year started," the Citi team wrote.
Frequently Asked Questions about this Article…
The bureau said the resources sector faced a tough year with a sharp rise in projects suffering cost blowouts or being deferred, a steep fall in exploration spending, and signs that investment has peaked — findings that add to views the commodities boom may be over.
Investment bank Citi and the bureau both signalled the peak of the investment cycle, with Citi saying this year should confirm the commodities supercycle has ended — a view supported by falling committed investment and weaker exploration activity reported in the bureau's study.
The bureau estimated Australia missed out on about $149 billion of spending over the past year after 18 major projects were deferred or cancelled, noting that this figure is likely conservative in some cases.
Cost blowouts totalled about $28.5 billion over the period, led by Chevron's Gorgon project, and represented roughly 11% of the $268 billion already committed to resources projects — inflating this year's figures and contributing to the perception that peak investment has passed.
The bureau forecast committed investment to fall by $8 billion next year and by $63 billion in 2015, with committed investment potentially reverting to around 2007 levels — about $60 billion — by 2017.
High‑risk greenfield exploration fell to $264 million in the December quarter, down 16% from the September quarter and 27% from the June quarter; lower exploration spending can signal fewer new projects ahead, which affects long‑term supply, company pipelines and investor expectations.
The report called out the Browse LNG project (the bureau valued its deferred spending at $36 billion, though some insiders suggested it could have been closer to $80 billion) and Chevron's Gorgon project for large cost blowouts; Woodside was mentioned in relation to Browse, and Citi and the Reserve Bank were cited for similar views on the investment peak.
Watch committed investment levels, announcements of project deferrals or cancellations, reported cost blowouts on major projects, and quarterly exploration spending figures — all of which the bureau highlighted as key indicators that helped signal the end of the recent resources investment boom.
Call 1300 880 160
Start a chat
Schedule a call
