Friday, August 31, 2012

Mining investment - we're nearer the edge of the cliff

Australia’s mining investment boom is coming off the boil, but slowly according to the latest ABS investment intentions survey.

Applying the usual realisation ratios ANZ Bank says mining investment this financial year should be 40 per cent higher than last year’s record $81 billion - a stellar result, but down on 45 per cent higher implied by the previous survey conducted three months ago.

“This confirms our view that many of the resource investment projects over 2012-13 are either committed or under construction,” said senior economist Justin Fabo.

“Investment will remain a key driver of near-term growth.”

“Nonetheless, the recent deferral of several large projects suggests that a combination of factors – the weaker global economy, lower commodity prices, rising costs and the high Australian dollar – have created significant risks that relatively marginal proposals could be shelved beyond 2013.”

The finding is consistent with a slew of other private sector forecasts that have mining investment continuing to grow until 2014 regardless of the plunge in minerals prices...

Actual mining investment surged 72 per cent in the year to June, 10 per cent of it in the June quarter. Capital spending in all other industries combined slid 4.8 per cent, most of it in the June quarter.

Analysts expecting a much sharper collapse in mining investment than the usual realisation ratios suggest point to the winding back of expectations between the March and June quarters, the first such decline since 1998-99.

“Large declines in the terms of trade typically see growth in business investment turn negative,” said Deutsche Bank chief economist Adam Boyton. “To be sure, we accept that the nature of the pipeline and also the still-high level of commodity prices might mean this time is different. Commodity prices might also rebound. That said, we see the risks being clearly to the downside.”

AMP Capital economist Shane Oliver said the mining investment boom still had “another year or two to go” but the peak was starting to come into sight.

“While there is the risk of a timing mismatch around the end of the investment boom in 2014 as other sectors take over in driving economic growth, the eventual end of the mining investment boom should lead to more balanced growth,” he said. “It should mean lower interest rates as the risk of an overheating economy subsides, that the best is over for the Australian dollar and a more balanced share market.”

In today's Sydney Morning Herald and Age

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