Wednesday’s decision by BHP Billiton to delay the Olympic Dam expansion could herald the end to Australia’s mining investment boom and commodities super-cycle.
Debate about when or if the boom had peaked started earlier this month when a report from Deloitte Access Economics had forecast a peak for resource sector investment in 2014/15. While commodity prices are unwinding, some argue sustained high volumes mean there is nothing for concern, while others argue falling prices and rising costs will impact profitability and could send some mines to the wall.
Earlier in the week, news broke that BHP Billiton’s major shareholders did not want the $30 billion dollar Olympic Dam expansion to go ahead. On Wednesday, BHP Billiton’s chief executive Marius Kloppers delivered the decision they wanted to hear, along with a profit announce they didn’t – a 35 per cent decline on the back of falling commodity prices.
Kloppers indicated falling commodity prices and rising costs were to blame for the Olympic Dam decision. There was an escalation in capital expenditure caused by tight labour markets and labour efficiencies, tight supplier marker, high exchange rates and high diesel costs. 140 staff from the Adelaide based Olympic Dam expansion team will lose their jobs, while BHP Billiton searches for a cheaper way to expand Olympic Dam.
The Olympic Dam decision just heightens the debate of the future of the mining boom. Martin Ferguson, Federal Minister for Resources and Energy voiced his opinion on radio saying “You’ve got to understand, the resources boom is over. We’ve done well.” Later, he was forced to clarify that his comments were in the context of commodity prices. Senator Penny Wong says the mining boom still has a long way to run, while Senator Stephen Conroy calls the pipe line of investment “extraordinary.”
It would seem you can’t find the answer in Canberra. But, it could reside in China.
China’s Fixed Asset Investment Bubble
China was the biggest beneficiary when much of the developed world spent more than they earned in the years leading up to 2007. This quickly changed when debt bubbles started bursting, and global consumption rapidly declined during the GFC.
To combat this issue, China embarked on a massive 4 trillion yuan economic stimulus program. Additionally, it told local governments to spend like mad and they did this off balance sheet, though SOEs (State owned enterprises) and LGFV (Local Government Finance Vehicles). This set the foundations for a large fixed asset investment boom. The beneficiary this time was us.
China built apartments, office towers, shopping centres, roads, transport infrastructure etc. Most were superfluous, would sit empty and with no cash flow, create future issues when the debt comes due.
You can read more in the post, Is China’s Construction Bubble ready to Burst? (25th June 2011)
In a post (China’s chief auditor warns of mounting debt) in June 2010 we reported the head of the National Audit Office, Liu Jiayi wrote “The scale is large, and the burden is quite heavy” when referring to SOE debts and North western University Professor, Victor Shih said China could be in for a “pretty large-scale financial crisis around 2012″ if nothing is done to address the issue.
Two months later in a post titled China extends stress tests to steel & cement we reported on 64.5 million urban electricity meters recording zero electricity consumption in a 6 month period suggesting there was 64.5 million homes empty and predictions they could house 200 million people.
Double Dip Recessions
But China wasn’t the only country that thought they were onto a miracle cure. Around the developed world, leaders – including those in Australia, thought they could fix unsustainable debt bubbles with stimulus and an endless number of bailouts. Everything would be right.
But as Europe heads back into recession, China is being dealt another blow to exports – just like in 2007. Trade figures released two weeks ago show China’s exports to Europe have plunged 16 per cent in the year to July. Exports to some Eurozone countries are down as much as 40 per cent. Total China exports were forcast to have grown by 9 per cent, but actually came in at just 1 per cent.
Today, the New York Times reports “the glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown.”
The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors.
But the main nongovernment survey of manufacturers in China showed on Thursday that inventories of finished goods rose much faster in August than in any month since the survey began in April 2004. The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases.
Even the Federal Reserve Bank of Dallas is on the band wagon with an August 2012 Economic Letter titled China’s slowdown may be worse than official data suggest.
Meanwhile, iron ore prices fell through the $100USD barrier today.
» Iron ore price slide will continue, say experts – The Sydney Morning Herald, 24th August 2012.
» China Confronts Mounting Piles of Unsold Goods – The New York Times, 23rd August 2012.
» China exports feel pain from Europe – The Australian, 24th August 2012.
» Australia miners tighten belts as ore prices fall – Market Watch, 23rd August 2012.
» Mining boom running out of steam – The Australian, 2nd August 2012.