10/01/2012 - 09:53

Analysis: When a boom deflates

10/01/2012 - 09:53


Save articles for future reference.

New Year is always a good time for starting a diet, and while WA has been expanding rapidly thanks to the resources boom it seems likely that the feast is over, for now.

Rising costs, falling commodity prices, tight money, and lingering fears about China suffering a hard economic landing as its property market verges on collapse, are four reasons which make 2012 look tricky.

Rather than talk about big resource projects moving off the drawing board into their construction phase we might soon be talking about the growing list of projects stalled.

None of this should be seen as the end of the boom. It will return because demand for commodities, especially energy in its many forms (oil, gas, coal, and uranium) has not been suddenly turned off.

Iron ore and other basic industrial materials will remain in demand in Asia, though the real question is whether China, India and Japan will step up their hunt for cheaper and less troublesome suppliers, preferably those without such a strong currency which makes investment even more expensive.

Reliability has always been Australia’s greatest attribute when competing against rival commodity producers in Africa or South America, but the whiff of industrial trouble wafting across our ports and airports is eating into that advantage.

What’s happening is that Australia is becoming an expensive and risky place for mining and oil companies to do business, and that is exactly what the owners of money do not like.

Investors want the highest possible return on their capital at the least possible risk, which is why WA became a centre of the global commodities boom, and why it is now fading as those four factors do their work.

  • Costs. No-one in WA needs reminding that cost increases are affecting decisions, whether it is to avoid paying obscene restaurant prices, such as $50 for a steak, or $5 for a cup of coffee, or developing a new mine, railway and port. Delays to the Oakajee port are all about cost increases, as are delays to Woodside committing to its Browse LNG project, and as is a doubled-price for the Sino Iron project which was budgeted at around $3 billion, but now has a price tag of $6 billion. Layered on top of conventional costs are new costs in the form of the carbon and mining taxes.
  • Falling Prices. Less obvious to the man-in-the-street, but most commodity prices have been contracting over the past 12-months, and are expected to continue sliding lower. It is highly unlikely that there will be a price crash, more a gentle decline, or a long-term flat outlook which, when costs are rising, has the same effect on profits as a price fall.
  • Tight Money. No prize for guessing that this is all about the current phase of the global debt crisis being played out in Europe where banks and governments are desperately seeking fresh funds to prop up their depleted balance sheets. Interest rates might be low, and in the case of the latest German bond issue, negative. In other words, investors are prepared to pay the German Government for the privilege of depositing money in its accounts because it is the country most likely to repay the capital.
  • China. It has become the modern-day version of Churchill’s Russia, “a riddle, wrapped in a mystery, inside an enigma”. At times, China appears to be comfortably weathering the global economic slowdown, at other times it appears to be tilting precariously close to recession which, in China’s case, means growth of less than 8% a year. Whatever the future direction of China’s economy, WA will follow.

So far, most of the economic forces mentioned, have been occurring in isolation. Oakajee’s postponement has not been linked with the slide in the price of iron ore, or stricter bank lending rules, or concern about a Chinese slowdown.

But, as 2012 unfolds those issues will coalesce in domestic politics and finger-pointing games as one side blames the other for an expanding list of projects moving off the boil until costs fall, or prices rise, or banks re-start lending, or investors regain their confidence, and China shakes off its uncertainties.

Happy New Year? Perhaps.


Subscription Options