Diversification looks like the key, but there’s not room for everyone.
Perhaps there is no place worse to be at this economic juncture than in mining services.
Not only has an expected tailing off in construction activity occurred, but a dramatic drop in commodity prices has hurt existing miners and endangered operations that are up and running.
In this atmosphere, the commodity oversupply challenge has cascaded down to affect demand for mining services, placing pressure on those with existing contracts to cut costs and creating intense competition for new contracts.
Wages, margins and share prices have all suffered as a consequence.
As always, those best placed to survive this change in circumstances are those best prepared for it. That doesn’t always mean they had foresight, just good business practices.
Better long-term relationships with customers, less debt, a strong management team with experience of different markets, and a strategy that provided for flexibility are all attributes of solid businesses in any sector.
As expected, those focused on mining are diversifying into other areas where similar skills are required.
Infrastructure development is one area with synergies.
However, just as the many mining companies have turned off the tap to development as they hunker down to maximise returns to investors from existing operations, governments too are constrained after a spending and debt binge that matched the private sector.
Instead of being able to fill the void left by the end of the mining boom, state and federal treasuries are crying poor. Regrettably, much infrastructure was needed during the boom and governments paid top dollar for it due to competition from the resources players.
The result is that the state, now facing downgrades in its credit status, has less money to spend when local employers want it to.
That is a shame. This newspaper is not a supporter of broad-based stimulus packages, believing them to be too much like a gamble and having the potential to drive the misallocation of resources as any other artificial spending measure.
Nevertheless, the timing of vital public infrastructure ought to consider the economic implications of competing with the private sector rather than complementing it.
In Western Australia, we may well regret the amount of state and federal spending during the boom, and wish that activity could be taking place over the next few years.
There is another area of hurt where, thankfully, government has acted with better timing by backing programs such as the Exploration Development Incentive.
The austerity in mining goes well beyond the immediate development of new mines or expansion of brownfields operations. It also includes exploration; the state’s major form of R&D.
That not only affects a certain group of mining services players, it also signals a worrying trend for the future.
Drilling today represents the mines of tomorrow and the more that is delayed, the further off new capacity will be when the cycle shifts back in favour of resources, and capital is allocated to miners.
