Is the Party Over?

There’s a feeling of déjà vu in Australia.  One could be forgiven for thinking we’ve returned to 2008.

Commodity prices have fallen to the same levels as those experienced at the height of the global financial crisis, projects have been cancelled and suddenly the obsession with Australia’s skill shortage has turned to job losses.

In 2008, many companies could have been accused of having a knee-jerk reaction.  Projects were halted and mass job cuts ensued.  The boom Australia had been experiencing for the five years preceding was apparently over.

In hindsight, Australia emerged from what can only now be described as a minor slowdown at the time with a $270b mining, oil and gas project pipeline that is the envy of the world.

Whilst current predictions have Australia overtaking Qatar as the world’s number one supplier of LNG by 2025, mining is telling a different story, a story more reflective of 2008.

First came the slowdown in coal production, and then the iron ore prices tumbled.

Iron Ore prices have fallen more than 20 per cent in the last month alone.  With the Australian dollar still above parity with the US dollar, input costs remain high and the viability of certain projects is clearly weak.

Australia’s major market, China has significantly cut steel production as they struggle with high steel stocks and weaker demand.  In fact, China’s steel-making peak body, China Iron and Steel Association has forecast a reduction in steel demand by 2025; 40 percent less than estimates by Australia’s three big miners – BHP Billiton, Rio Tinto and Fortescue Metals. 

Whilst the three miners have been touting a recovery in iron ore prices in the second half of the year driven by increasing demand for steel for infrastructure projects, China appears reluctant.  Lei Song, president of steel consultancy ChinaTSI says Australian miners got “carried away” in expanding production so rapidly and expecting that China could consume one billion tonnes of steel in a year.  He cites a peak demand of 800 tonnes per annum being more likely.  

Fortescue Metals chief executive Nev Power said in August that Australia is simply seeing the natural lag in the market of the length of time it takes to adjust production to suit the market.  He also said that the moves made by China were expected and would lead to a rebound in iron ore prices to at least $US120 per tonne in the near future. 

Just three weeks after these comments, Fortescue announced 600 job cuts and cancelled plans for expansion.

In a few short months, Australia has seen a number of other major projects shelved.  BHP Billiton's decision to can more than $20 billion of Pilbara expansion together with its Olympic Dam expansion has created a wave of redundancies amongst its engineering contractors with more than 500 jobs already slashed.

This follows job cuts by Anglo American, BMA, Rio Tinto, Xstrata and now Fortescue Metals.

With conflicting commentary from mining leaders, ministers and analysts, which is it then – boom or bust for Australia?

The short answer is, it’s neither.

According to Manager of Australia’s Resource Energy Skills Alliance, Paula Bennett, Australia has not been experiencing a traditional ‘mining boom’, but rather a ‘super cycle’, the form of which has never before been experienced. 

She says a more apt description is the notion of a super‐cycle which contains peaks and troughs associated with commodity prices rather than a single boom period.

Clearly though, words are important. People, politicians and investors associate words such as “boom" with "bust".

According to Peter Sheehan, Professorial Fellow at the Centre for Strategic Economic Studies at Victoria University, there is a need to precisely define what is meant by the “end of the resources boom”. 

He says there are three key elements.

The first is the end of a period of very high commodity prices and terms of trade. Prices and terms of trade (whilst still high) have been consistently falling.

The second is the end of a period of very high resources investment – and this isn’t coming to an end yet. Although it is the near the top, the Reserve Bank of Australia said this month that they expected it to peak in 2013-14.  According to Mr Sheehan, Australia is indeed coming close to a peak in investment and it might well drop sharply after passing that threshold.

The third element relates to the high dollar exchange rate. There’s no sign of that coming to an end.

According to Mr Sheehan, there is no definitive answer; some parts of it have ended and some parts of it will continue on for a while.

What we do know is that Australia has 272 committed projects across mining, oil and gas.

In contrast to mining, Australia’s oil and gas sector continues its impressive growth.  According to a recent report commissioned by the Australian Petroleum & Exploration Association (APPEA), gas from coal deposits could create an industry capable of generating 20,000 full-time jobs each year by 2035 and lead to a cut of 10 per cent in wholesale electricity prices.

In the past year, four Australian liquefied natural gas (LNG) projects worth a combined $90 billion have been approved.

Australia's third LNG plant started production in April and there are a further seven LNG projects worth $170 billion being built.

Whilst much market commentary has centred on the deferrals and delays of several slated investment projects, it’s important to remember that the production side of the boom is not yet in full swing.

As projects reach completion, production comes online and, market conditions allowing, Australia will see continued jobs growth for five or six years and the competition for skills will remain high.

From an economic point of view, the production side of mining and oil and gas uses very little labour in comparison to the construction phase. Once Australia gets past the construction pipeline, labour requirements will fall dramatically in that area.

This means that resources production and export will yield positive economic numbers, but will do little for significant employment and income growth in Australia.

Is the party over for Australia?  Not entirely.  There will still be a demand for skilled labour and jobs growth but not on the scale touted as recently as six months ago.  Simply, the party may not be entirely over but not as many as we originally invited will now be granted entry.