How Australia is Sliding Down the Other Side of the Mining Boom

That deafening silence you hear is the end of the Australian mining boom. Yesterday, the Bureau of Resources and Energy Economics (BREE) released their bi-annual report on ‘Resources and Energy Major Projects’.

BREE reports that over the past 12 months around $150 billion of projects have been delayed, cancelled or reassessed. Investment activity is still very high, but it’s the future pipeline of work that is a worry.

Below is a chart from the BREE report showing the current, likely, and possible investment pipeline for committed projects through to 2018. The ‘current’ projection is not the one to focus on, as it doesn’t take into account projects that will flow through from the ‘publically announced’ and ‘feasibility’ stage. The ‘likely’ scenario is probably the most realistic. Still, it doesn’t look too good.

Now compare the above chart to the one below, which shows the value of committed projects over the past 10 years…

In other words, by 2018 we’ll be back to 2003 levels in terms of project investment. Actually, it will be much worse than that, because the dollars are nominal — that is, they don’t take into account price inflation in the sector.

Join these two charts together and you get a classic boom and bust situation.

So what does this mean for the Australian economy?

Well, the first point to note is that the decade long investment boom will produce an income stream in the years to come via increased exports. But the investment decisions were made at a time when the outlook for commodity prices was very different. That means some of this investment will not be as productive as initially thought. In other words, the return on investment will be lower than first expected.

And just as Australia’s mining boom ends, Australia has to deal with China having a reduced appetite for our commodities. That will have an effect on our terms of trade, which will have an effect on national income, which will have an effect on the property market and the banks.

We’ve been making that argument to Sound Money. Sound Investments subscribers for months now. These things take time to flow through the economy. And when you get the Reserve Bank of Australia cutting interest rates and a knee-jerk reaction that lower rates will surely be good for stocks/housing/consumers, the underlying trend gets lost in the hype.

We said that rising stock prices and the apparent ‘recovery’ in housing was simply a trap and not to fall into it. It’s certainly looking that way at the moment. The Australian mining boom has underpinned our economic growth for a decade. It has supported capital inflows to sustain our standard of living and boosted incomes enough to sustain our world-class property boom for longer than most predicted.

But now we’re sliding down the other side…

Here’s another way of looking at it. The chart below shows business investment components as a share of nominal GDP. As you can see engineering is around 7.5%, up from around 1% before the boom kicked off. That’s nearly all mining boom related.

As engineering’s share of GDP turns down, what will take its place? That’s the question we need to ask because if nothing steps up to replace it, Australia could face its first recession in more than two decades. The consumer looks fragile, and it’s hard to believe we might be on the cusp of another leg up in housing.

Right now we think the odds of a recession are higher than they have been for many years. It will be interesting to see how defensive the banks are in such a scenario.

Greg Canavan
for Markets and Money

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From the Archives…

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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