It's a phrase we hear quite a lot at the moment, but is Australia's mining boom over?
When people say that "the mining boom is over", what they generally mean is that the dollar value of the construction of Australia's mines, which has seen vast capital expenditure undertaken over recent years, is finally passing its peak.
The latest round of figures showed seasonally adjusted total capital expenditure in Australia of a huge $38.51 billion for the period Dec Quarter 2012 to March Quarter 2013. That is a truly massive figure in historic terms for Australia:
Source: ABS
As you will see from the chart above, $38.5 billion is a staggering sum, and one which we could have only dreamed of just a few years ago. So in that sense, at least, the "mining boom" is not over.
However, as you will see clearly from the chart, total new capital expenditure has begun to fall, by a non-trivial 4.4% in the last quarter, and we might expect the total expenditure to continue falling in the coming months and years, as we can't simply construct mines forever.
Therefore, these cumulative drops will start to represent a drag on GDP growth and the Reserve Bank will likely keep interest rates very low in order to stimulate the other areas of the economy.
What is interesting to note from the most recent capex surveys is that projected total capital expenditure figures may not drop off a cliff as feared. Instead, they forecast that the figures will plateau and drop more gradually:
Source: ABS
And here you have it in words:
"Estimate 6 for total capital expenditure for 2012-13 is $163,018 million. Estimate 2 for total capital expenditure for 2013-14 is $156,467 million."
A little lower for the 2014 financial year, but perhaps not disastrously so.
It is a similar story for mining only capital expenditure:
Source: ABS
And in words:
"Estimate 6 for Mining for 2012-13 is $98,268 million. Estimate 2 for Mining for 2013-14 is $101,897 million".
A little disappointing, perhaps, given what 'might have been', because as you will see from the non-shaded bars it was once felt that the actual figures would 'peak out' some way higher than they now will.
But again, hardly a disaster for the 2014 financial year if mining capital expenditure holds at above $100,000 million.
Plateau or cliff?
Is this 'plateau' just wishful thinking? Will capital expenditure actually drop off a cliff and begin to punish our economy? In truth, we don't really know yet and only time will tell.
As someone who used to prepare mining capex surveys and forecasts for the Australian Bureau of Statistics (ABS), one thing I can tell you with certainty is that they are as much an art as they are a science, particularly with regards to which periods projected expenditure will fall into. Just as when forecasting GDP, the number of variables involved are too many to consider with a high level of accuracy.
It is worth noting that the 'actual' figures have sometimes been coming in lower than had been forecast, so we'd be wise to look at the 'expected' figures with a healthy level of scepticism.
From construction to production
The other point to make is that the mining boom to date has mainly been about the construction of mines.
Eventually, of course, the point of constructing a mining project is that it will subsequently begin churning out massive output which should fuel the next stage of the mining boom: the production phase.
There will be indeed be some wobbles in the interim. As a general rule it takes more people to build mines than it does to operate them, so we may see a spike in unemployment, which is another reason that low interest rates will prevail.
Commodity prices
Disappointingly for Australians, commodity prices have weakened from their peak:
One piece of good news is that the iron ore spot price has rebounded to above US $125/tonne.
And, better still, the Aussie dollar has thankfully at long last fallen from 106 US cents to just 90 cents, which means that in Aussie dollar terms the iron ore price is closer to A$140/tonne.
This is a darn sight healthier than the $60/tonne that some were forecasting in October 2012. A volatile commodity combined with a volatile currency...watch this space!
Australia is the world's largest exporter of iron ore and forecasts a 14% increase in exports in the 2013-14 fiscal year. Coal and iron ore exports have already boomed over recent years, increasing from $17.7 billion in 2001 to $110.9 billion in 2011, a sixfold increase.
In accounting terms, Australia will shift from investing in construction capital expenditure to generating revenues.
Summary
Overall, the capex figures in the charts above at this stage seem to imply that the economy will have a fair amount of time in which to rebalance itself as the dollar value of construction should not immediately plummet. But we'll have to keep a close on the data in coming months in order to be more certain about that.
In the meantime, keep watching the labour force employment figures and note whether the low interest rates begin to generate economic growth elsewhere in the economy in the coming months. In particular, the RBA would like to see dwelling construction start picking up to follow a surge in approvals.
We've done well at building mines; now we need to build some houses.
s
