Throughout the year, sovereign debt, patchy economic data readings, elections, rescue packages and fiscal cliffs have driven markets and investor sentiment. In 2012 we’ve seen some record breaking positive runs in equity markets, never before seen yields on bonds, glimmers of recovery, a whole lot of new acronyms to describe the various rescue packages and the pros and cons of an increasingly slim budget surplus in Australia.
Enough talk about America’s fiscal cliff (which looks set for a reasonable compromise as I write this), Australia is facing its own longer term “cliff” – the looming fall in mining investment. We are all familiar with the story by now, but with the spending high water mark close, it’s worth pondering what’s over the horizon.
The ABS’s release of capital expenditure intentions which showed a slowdown in the rate of spending growth for 2012/13, brought home just how close the high water mark may be. Of course the press wrote it up as a “record downgrade to capital spending plans”. This is technically correct, with total mining expected capital expenditure falling to a $109 billion estimate for the June 2013 year, down 8.1% from last quarter’s estimates as weaker commodity prices, doubts about emerging market demand and increased supply weigh on the minds of resources executives responsible for making long term capital expenditure decisions. I don’t know about you, but to me $109 billion is still serious money. Although the level of investment looks like it's coming down, it’s still elevated from say five years ago when annual mining capital expenditure was more in the region of $30 billion.
Importantly, there’s a big pipeline of projects ahead with 11 mega projects at the committed stage, mostly in LNG. A recent report from the Bureau of Resources and Energy Economics points out that just one more LNG approved mega project would mean that there is “more invested in LNG, gas and petroleum projects in Australia than the total amount spent by the US government on the Apollo Moon Program (in 2012 prices)”!
Logically, this increasing mining spend must abate at some time. The following chart shows, in today’s dollars, the actual total annualised capital expenditure across our economy has boomed. Underpinned by the mining boom, business investment as a share of GDP has climbed to around 18% of GDP versus its long run average of around just under 10% of GDP.
Annualised Actual Quarterly Capital Expenditure (in current dollars 000's)
Enough talk about America’s fiscal cliff (which looks set for a reasonable compromise as I write this), Australia is facing its own longer term “cliff” – the looming fall in mining investment. We are all familiar with the story by now, but with the spending high water mark close, it’s worth pondering what’s over the horizon.
The ABS’s release of capital expenditure intentions which showed a slowdown in the rate of spending growth for 2012/13, brought home just how close the high water mark may be. Of course the press wrote it up as a “record downgrade to capital spending plans”. This is technically correct, with total mining expected capital expenditure falling to a $109 billion estimate for the June 2013 year, down 8.1% from last quarter’s estimates as weaker commodity prices, doubts about emerging market demand and increased supply weigh on the minds of resources executives responsible for making long term capital expenditure decisions. I don’t know about you, but to me $109 billion is still serious money. Although the level of investment looks like it's coming down, it’s still elevated from say five years ago when annual mining capital expenditure was more in the region of $30 billion.
Importantly, there’s a big pipeline of projects ahead with 11 mega projects at the committed stage, mostly in LNG. A recent report from the Bureau of Resources and Energy Economics points out that just one more LNG approved mega project would mean that there is “more invested in LNG, gas and petroleum projects in Australia than the total amount spent by the US government on the Apollo Moon Program (in 2012 prices)”!
Logically, this increasing mining spend must abate at some time. The following chart shows, in today’s dollars, the actual total annualised capital expenditure across our economy has boomed. Underpinned by the mining boom, business investment as a share of GDP has climbed to around 18% of GDP versus its long run average of around just under 10% of GDP.
Annualised Actual Quarterly Capital Expenditure (in current dollars 000's)
Source: ABS.
So, what happens next? Do we fall off a mining investment cliff? Well that depends on the profile of future mining spending. One scenario is that as the peak has come off earlier and at a lower level than expected, then there is less of a cliff to fall off. To the extent that completed projects deliver higher exports, then these will add to future growth, offsetting the drag from falling levels of mining investment. To the extent that mining investment has “crowded out” other types of investment, then there is scope for these to rebound as mining projects consume less of the economies available resources.
If global growth surprises on the upside over the next couple of years as the peak in austerity measures pass and there is an improvement in confidence and global demand we could see a second wave of investment with some projects getting the tick.
In the meantime, we have the RBA doing its best to fire up growth in the interest rate sectors of the economy. Its work faces headwinds from a stronger currency and the artificial deadline for a balanced budget by 30 June next year. Our Fixed Interest team believes that there is at least one more easing in the pipeline over the first half of next year.
One thing is for certain, the December quarter capital investment intentions survey (due for release on 28 February 2013) which gives us the first look at 2013/14 expectations, will be eagerly analysed to give us a better idea of the size of any mining “cliff”.
So, what happens next? Do we fall off a mining investment cliff? Well that depends on the profile of future mining spending. One scenario is that as the peak has come off earlier and at a lower level than expected, then there is less of a cliff to fall off. To the extent that completed projects deliver higher exports, then these will add to future growth, offsetting the drag from falling levels of mining investment. To the extent that mining investment has “crowded out” other types of investment, then there is scope for these to rebound as mining projects consume less of the economies available resources.
If global growth surprises on the upside over the next couple of years as the peak in austerity measures pass and there is an improvement in confidence and global demand we could see a second wave of investment with some projects getting the tick.
In the meantime, we have the RBA doing its best to fire up growth in the interest rate sectors of the economy. Its work faces headwinds from a stronger currency and the artificial deadline for a balanced budget by 30 June next year. Our Fixed Interest team believes that there is at least one more easing in the pipeline over the first half of next year.
One thing is for certain, the December quarter capital investment intentions survey (due for release on 28 February 2013) which gives us the first look at 2013/14 expectations, will be eagerly analysed to give us a better idea of the size of any mining “cliff”.
Indices:
The Australian All Ordinaries Index has moved up increasing +48 points (or +1.0%) since closing last Friday to 01:25 pm today.
The rest of the world as measured by the MSCI index increased +3 points (or +0.3%) in A$ from closing last Friday to end of trade Thursday.
No comments:
Post a Comment