Resources industry veterans know they are in a cyclical business, but when will things turn positive again?
While the oft-quoted phrase “rumours of my death have been greatly exaggerated” is attributed to author Mark Twain, it is a line that could easily be adapted to describe the resources sector.
Certainly, the twin pillars of Western Australia’s economy – mining and gas – were hit hard by plunging
commodity prices just as the state’s massive construction phase was fading.
The precipitous fall in iron ore and oil prices has ensured that the end of the building cycle was more brutal than it may otherwise have been. Worse, it has coincided with layoffs associated with operational cost cutting, as producers sought to rapidly reduce costs to a level more suited to the environment.
It has been a difficult period for a lot of people and many companies.
While it is easy for commentators to discuss cutbacks with metaphors more suited to describing a weight loss program (shedding unnecessary bulk, for example), the truth is, there are real casualties – jobs, shareholder value and future plans of people and businesses can result in catastrophe for some.
However, the evidence to date is that the carnage is not as bad as was anticipated.
Unemployment is higher, but the dole queues are not excessive when compared with those in other states, partly because many of the workers affected were not permanent residents in WA, and partly because there was latent demand for staff in non-resources sectors, albeit at lower wage rates.
Individual bankruptcies and business insolvencies are rising, but not at unnaturally high rates. Perhaps people and business owners leaned from the GFC that booms don’t last forever and they had to plan for an end game.
House prices have fallen, but only marginally. Only the top end of town has been significantly affected and, arguably, those are the people who have the most ability to adjust.
Investment has slowed but it hasn’t stopped. In some cases it is benefiting from lower purchasing and construction costs; in others cases, sectors such as agriculture and apartment construction have been the beneficiaries of funds looking for a new home.
This story is well told in two parts of this newspaper.
Firstly, our mining projects feature has taken a close look at the handful currently under way and the many aspiring to get off the ground; it has a surprisingly positive tone about it.
The best people to read the tea leaves of the industry are the veterans who have lived through multiple cycles. WA has a lot of them, and they are not panicking; instead, they are preparing for the day when commodity prices and financial markets improve, as they invariably will.
In a similar vein, Tim Treadgold’s Bystander column also has an upbeat flavour. Treadgold enjoys being countercyclical in his views but he stacks up the evidence that the resources sector has bottomed (and does not appear to be out on a limb in expressing that view).
Short of another unpredictable global calamity, it may well be that the economic storm has passed WA and, after the battering of wind and waves, we can step out into the eerily calm streets to discover that, despite the mess, the infrastructure is largely intact.
Let’s hope so.
Let’s also hope that the next phase is more measured than the last. With costs down, many existing businesses and startups have a much greater chance of competing globally. In all likelihood the next phase of growth, whenever that truly kicks in, is likely to be less volatile than the past decade.
The world now has a big supply of key minerals such as iron ore; it is unlikely that it will need or be able to double that capacity again in the next decade. That suggests price growth, and therefore new projects, will be steadier and the economic conditions more manageable.
The only risk is that heavily indebted governments won’t have the growth rates required to pay off those loans. Whether that prompts restraint or silliness is yet to be seen.