Wednesday’s decision by BHP Billiton to delay the Olympic Dam expansion could herald the end to Australia’s mining investment boom and commodities super-cycle.
Debate about when or if the boom had peaked started earlier this month when a report from Deloitte Access Economics had forecast a peak for resource sector investment in 2014/15. While commodity prices are unwinding, some argue sustained high volumes mean there is nothing for concern, while others argue falling prices and rising costs will impact profitability and could send some mines to the wall.
Earlier in the week, news broke that BHP Billiton’s major shareholders did not want the $30 billion dollar Olympic Dam expansion to go ahead. On Wednesday, BHP Billiton’s chief executive Marius Kloppers delivered the decision they wanted to hear, along with a profit announce they didn’t – a 35 per cent decline on the back of falling commodity prices.
Kloppers indicated falling commodity prices and rising costs were to blame for the Olympic Dam decision. There was an escalation in capital expenditure caused by tight labour markets and labour efficiencies, tight supplier marker, high exchange rates and high diesel costs. 140 staff from the Adelaide based Olympic Dam expansion team will lose their jobs, while BHP Billiton searches for a cheaper way to expand Olympic Dam.
The Olympic Dam decision just heightens the debate of the future of the mining boom. Martin Ferguson, Federal Minister for Resources and Energy voiced his opinion on radio saying “You’ve got to understand, the resources boom is over. We’ve done well.” Later, he was forced to clarify that his comments were in the context of commodity prices. Senator Penny Wong says the mining boom still has a long way to run, while Senator Stephen Conroy calls the pipe line of investment “extraordinary.”
It would seem you can’t find the answer in Canberra. But, it could reside in China.
China’s Fixed Asset Investment Bubble
China was the biggest beneficiary when much of the developed world spent more than they earned in the years leading up to 2007. This quickly changed when debt bubbles started bursting, and global consumption rapidly declined during the GFC.
To combat this issue, China embarked on a massive 4 trillion yuan economic stimulus program. Additionally, it told local governments to spend like mad and they did this off balance sheet, though SOEs (State owned enterprises) and LGFV (Local Government Finance Vehicles). This set the foundations for a large fixed asset investment boom. The beneficiary this time was us.
China built apartments, office towers, shopping centres, roads, transport infrastructure etc. Most were superfluous, would sit empty and with no cash flow, create future issues when the debt comes due.
You can read more in the post, Is China’s Construction Bubble ready to Burst? (25th June 2011)
In a post (China’s chief auditor warns of mounting debt) in June 2010 we reported the head of the National Audit Office, Liu Jiayi wrote “The scale is large, and the burden is quite heavy” when referring to SOE debts and North western University Professor, Victor Shih said China could be in for a “pretty large-scale financial crisis around 2012″ if nothing is done to address the issue.
Two months later in a post titled China extends stress tests to steel & cement we reported on 64.5 million urban electricity meters recording zero electricity consumption in a 6 month period suggesting there was 64.5 million homes empty and predictions they could house 200 million people.
Double Dip Recessions
But China wasn’t the only country that thought they were onto a miracle cure. Around the developed world, leaders – including those in Australia, thought they could fix unsustainable debt bubbles with stimulus and an endless number of bailouts. Everything would be right.
But as Europe heads back into recession, China is being dealt another blow to exports – just like in 2007. Trade figures released two weeks ago show China’s exports to Europe have plunged 16 per cent in the year to July. Exports to some Eurozone countries are down as much as 40 per cent. Total China exports were forcast to have grown by 9 per cent, but actually came in at just 1 per cent.
Today, the New York Times reports “the glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown.”
The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors.
But the main nongovernment survey of manufacturers in China showed on Thursday that inventories of finished goods rose much faster in August than in any month since the survey began in April 2004. The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases.
Even the Federal Reserve Bank of Dallas is on the band wagon with an August 2012 Economic Letter titled China’s slowdown may be worse than official data suggest.
Meanwhile, iron ore prices fell through the $100USD barrier today.
» Iron ore price slide will continue, say experts – The Sydney Morning Herald, 24th August 2012.
» China Confronts Mounting Piles of Unsold Goods – The New York Times, 23rd August 2012.
» China exports feel pain from Europe – The Australian, 24th August 2012.
» Australia miners tighten belts as ore prices fall – Market Watch, 23rd August 2012.
» Mining boom running out of steam – The Australian, 2nd August 2012.
hmm, will this lead to unemployment?
If we can’t flog off our dirt and vapors then how will the government afford to keep the housing market inflated? how are they going to be able to pay for the returns of the millions of negatively geared property speculators???
oh the humanity!
And all our fellow neighbours being rubbed out at ‘No Doc ‘ who number in the 10’s – 100’s of thousands have no equity anymore and either the banks will take a hit or the quantity of real estate = 2X the insolvent loans will hit the market as mortgagee sales…
Our case seems similar to yours Lisa. A refinance with fraudulent documentation all the way. 2007 we had a small mortgage and $550K equity. It was an asset lend – $600K line of credit. Today we owe over $1,000,000 + and have NO eqity. Refinance was 2009. So if we were placed back to 2009, this was highly unaffordable loan. So, I have left that bit out “being put back into the financial position…” in my complaint letters and just demand full extinguishment of loan – The Lender cannot profit from fraud. We were conned. Besides, the lender never handed over any physical money.. it’s all computer generated! All Lenders should just extinguish ALL fraudulent loans NOW.
As a proud Crow Eater, many here in SA wanted to see Olympic Dam to go ahead, simply as more jobs for the hard working local families trying to make a living. But it was also clear from some of the media I have seen, particuraly from the REI, that they were praying for Olympic Dam as a source of increased capital gains (around the whole state), and business for them. I recall a comment from The Advertiser several months ago from a major RE firm here that it (Olympic Dam), could lead to prices like Perth, much to their gleefull anticipation ! Well not anymore thats for sure ! I think if there was any example of the cold winds of Europe and USA blowing our way, this is it.
You are correct Averagebloke……… I have been saying all along once the first pieces start to crumple the rest wont be far behind. Now that China is slowing down and even at a faster pace now this is going to kill Australia, Canada, Brazil Russia and some more. They were all to dependent on China. They should quit worrying about what Jilla did in 1995 and start asking what is plan B if mining and the rest of the economy crash. I bet I can answer that one NOTHING no plan B at all…..
Looks like the gig is up yet we have a big recruitment drive in Ireland by Australian Mining Companies for Irish Tradesmen. Hard to know who is telling the truth these days. If it does pop, god help Australia
An amusing interview with Abbott re the current tax system and its effect on this decision. Is bhp just being forced to shut up? More to it? I don’t see how any form of expense can help make anyone more competitive… But thats just me http://www.abc.net.au/7.30/content/2012/s3573785.htm
It won’t be long before our television screens regularly show nothing but thousands of workers being laid off at mining sites. This footage will accompany thousands more that are being laid off from factories going bust (which is happening already).
But never mind, Gillard and Swan will be just as regular on television saying “Everything is fine. Australia is the envy of the world. Australia has low unemployment, our economy is strong and our banks are the best in the world.”
And anyone who doesn’t agree is doomsdayer and un-Australian.
@ Damian August 25th, 2012 at 6:27 am;
This behaviour is simply a feature of the tail end of any commodities cycle. The pattern never varies. Demand ends up growing too fast. Supplies get short and the price soars. Interested parties intensify their investment cycle to capture these high prices just as demand is starting to fall, due to these being too high. This creates a larger glut. Prices then plunge…
@ Peter_W.
No, No, No. Do not extinguish any loans. It is only right for the economy, if those who extended themselves beyond their means have to pay it out.
No banker held a gun to a borrower forcing them to borrow.
No average wage earner (even if you are >$100k p.a.) could ever pay back $1m, used on non-productive investments.
FFS, the savers in this country are already getting screwed on the amount of interest they are earning, which incidently has financed this poor level of investment.
Cut out the middleman (ie. banks). If anyone were to approach me face to face and ask for a loan for an investment property, I want an interest rate that suits the risk involved.
But, unfortunately, Australian’s believe that property investing is risk free.
If loans are extinguished en mass, our entire economic system collapses rapidly.
I still argue, no-one can honestly say they were conned into borrowing more than they could pay. NO ONE. You borrowed more than you can afford, now take your medicine.
If Swan and Gillard want to be the envy of the world, they need to get serious about this issue. Make it clear that purchasing a property is an investment, and like any investment there is risk involved. Some will win, some will lose. The better informed you are/were, the better your chance of a good out come.
If loans begine to be extinguished, watch company borrowing spike upwards. Moral hazard anyone?
I think BHP are just playing games with the govt andsaying to Julia letting them know thatt they will not go ahead with capital spending because of the carbon tax and unions. The unions are making capital spend projects unviable.the south Australian govt will losebillions in royaltiesand so will the real estate industry unions etc. That’s what greed does it eventually makes projects unviable and we all end up suffering the consequences. Good one Julia keep up the.good work . Now for the property collapse in SA.
No, its all good….. as a matter of fact…… “Mining boom not even halfway over: Emerson”
http://www.theage.com.au/opinion/political-news/mining-boom-not-even-halfway-over-emerson-20120826-24u29.html
There’s a point where… if you talk the talk long and hard enough, you end up believing your own bull.
To continue quoting from the article :
“Employment Minister Bill Shorten said his department projected another 100,000 jobs would be created in the mining sector over the next five years.
‘‘I don’t think that the contribution that mining’s going to make in jobs and economic output for Australia has at all peaked,’’ he told the Ten Network.
But he noted the services sector was likely to create some 800,000 jobs in the same period, most of which would require post-Year 12 qualifications.”
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So technically speaking, we currently have an unemployment rate of approx 5 percent, so if this garbage quoted above is true then within 12 months we should have another 900,000 employed approx, which means close to zero percent unemployed ?.
Like I said before… bull crap hard enough and you………..
@ Matty
1. If the loan is fraud then the bank needs to writedown the loan… The High court has said this.
2. If the loan valid but its uncommercial asset lending/speculation and unservicable/unpayable the borrower should go BK ASAP… Its the bans problem to deal with… thats their job.
The devil is in the detail, but owner occupiers are more likely to be 1. Investment loans are more likely to be 2…. IMHO
Mining CEOs and Pollies are both forecasting volume growth. Where is this going to come from? Will China build more empty apartments and office towers?
@ Tom
well it’s a possibility. Remember, China is run by a corrupt communist dictatorship. Come to think of it the Australian Housing Market is run by a morally corrupt group of Bankers, Media Barons and Bureaucrats
The oft quoted mining pipeline of $400 billion just shrank by 10%. Poof. Gone. Just like that. One might call that the leading edge of a mining bust.
http://au.tv.yahoo.com/sunrise/video/-/watch/30467376/staring-recession-in-the-face/