Dodgy brakes see mining miss the peak

New research suggests resources investment may have already peaked, revealing an urgent mining sector crunch made worse by labour hurdles and management haste.

The Bureau of Resources and Energy Economics has put some numbers around the likely fall off in resources investment and they aren’t pretty.

On the bureau’s analysis, the likely scenario for investment in resources and energy is that it has already peaked, at about $268 billion last year, and will start falling quite sharply from next year before tailing off to only about $25 billion in 2018, roughly around the levels experienced in 2007.

It does say that it is possible that if all the projects it has classified as at the "committed" level were to go ahead, investment could peak at $310 billion in 2014 before declining to $138 billion in 2018 and describes that as an "enormous" investment opportunity for the country.

The trends and circumstances, however, aren’t good.

The combination of tumbling commodity prices and rising costs has seen a lot of announced investment shift from the committed category back into the feasibility or 'publicly announced' categories the bureau uses.

The level of committed investment has actually remained steady since the bureau’s last analysis was published in October even though the number of projects in that category has dropped from 87 to 73. The explanation for that apparent contradiction is a $28.5 billion blowout in the costs of those projects, primarily the LNG projects.

There are a lot of projects slipping back from committed to feasibility stage to 'publicly announced' as the pressures mount on the economics of resource projects. The bureau estimates that about $150 billion of projects at the feasibility stage have been delayed, cancelled or reverted back to the 'publicly announced' stage. That’s a trend that is almost certainly going to continue.

Within those projects at the feasibility stage, for instance, are 57 coal projects worth almost $57 billion (six months ago there were 63 worth $76 billion). With the coal industry saying that a majority of the existing coal mines are either losing money or barely profitable the prospects for those 57 potential new mines look grim.

Previously classified as being within that category are Woodside’s Browse LNG project and BHP Billiton’s Outer Harbour and Olympic Dam expansion projects.

Development of the $36 billion Browse project has been shelved, although it might be revived if Woodside decides to use Shell’s floating LNG technology. Outer Harbour ($30 billion) and Olympic Dam ($20 billion-plus) have been shelved indefinitely and may never be resurrected.

Given the current level of uncertainty about China’s growth rate and, consequently, commodity prices, the surge in new supply that is underway from past investment here and offshore and the escalation in costs that occurred during the boom period it is probable that, with the possible exception of some LNG projects and incremental iron ore expansions in the Pilbara, few of the projects that aren’t already underway will be developed during this commodity price cycle.

Whether that’s a potential $113 billion missed opportunity – the difference between the bureau’s likely and possible scenarios – or something considerably more, there is an element of self-inflicted harm in the rate at which the boom is starting to wind down.

A large part of that is due to the inability of resource company managements to control costs in the race to get resources into production and within a labour and equipment-constrained environment. The Australian dollar has played a part and the relative lack of flexibility and mobility within the economy hasn’t helped. China’s slowdown even as the supply of commodities swelled, of course, has also had a very significant impact.

The legacy of the resources investment boom will, of course, be greatly increased production and export revenues but that will probably not be sufficient to offset the loss of value from the lower prices.

Whether the rest of the economy will benefit from the subsidence of the resources investment boom and the competition of capital and labour – and the end of the Australian dollar's strength built in part on capital inflows to finance the boom – is an open but critical question.