About to bust? What's with the mining boom?

Here's why everyone is saying the Mining Boom is over

THERE is talk that the great Australian mining boom - which has helped the country avoid recession for 21 years - is over.

Resource Minister Martin Ferguson said last week that "anyone with half a brain" knows the resources boom is over. Deutsche Bank warned of the end of the investment boom and even a recession in 2013.
On the flip side, a NAB report predicts the resources investment boom isn’t over and will continue until 2013-2014 and perhaps will not peak until 2015. And, last week Reserve Bank governor Glenn Stevens took the "glass half full" outlook and said he sees no sign the boom is over.

It’s over, it’s not over, it’s over….
Here's a breakdown of what's happening:
The Iron ore bubble
As far as bubbles go – this is one of the biggest and it looks like it’s about to burst.

The price of iron ore has increased tenfold over the past 10 years and it's Australia’s biggest export. But the price of the steel making ingredient has fallen 30 per cent in the past two months. Yesterday, iron ore prices hit a two-year low, nosediving $US4.50 to $US90.30 per tonne.

If the price doesn’t pick up the collapse threatens to put a big dent in Government revenues (to the tune of $10 billion) and mining incomes. Some analysts are saying the price won’t pick up any time soon. Others are optimistic however such as Fortescue Metals chief Neville Power who yesterday said he believes the price will go back up to $US120 a tonne – a mark for when Chinese production is profitable again.

So, we need China to step up spending on power, water, rail and road infrastructure programs.

It all hinges on China

We’ve heard it before, but it all really does hinge on China.

Twenty-five per cent of Australia’s exports go to China and 60 per cent of these shipments are iron ore. It’s shipped over to China’s steel makers for industrial expansion, the 90 million houses it has built over the past 15 years and other infrastructure.

If China’s demand for steel falls – which data seems to show it has – Australia is left massively exposed. As it stands in China there are more than two million unsold homes and an estimated 30 million under construction signalling China’s iron-ore imports are going to slow down dramatically.

According to this morning’s AFR, China’s biggest steel makers are also planning to shut unprofitable capacity permanently over the second half of 2012.

Investors are nervous…and shelving massive projects doesn’t help
Big alarm bells sounded last week when BHP scrapped $20 billion plans to expand the Olympic Dam, blaming soaring development costs, a high Australian dollar and falling commodity prices. Expansion of Woodside Petroleum's $15 billion Pluto project in Western Australia is also on hold.

Investors are getting nervous. They’re worried the drop in iron ore prices will stop the big miners such as Fortescue Metal being able to pay off its $6 billion debt.

Rio Tinto shares fell yesterday below $50 for the first time since 2009.

Atlas Iron plunged more than 5 per cent.

Drilling contractor Boart Longyear shares dived by more than a whopping 33 per cent yesterday after it slashed its full-year profit forecast, blaming an expected slowdown in global mining activity.

In response to pressure from shareholders worried about poor returns in the weak global markets, miners have put the brakes on capital spending.

On the bright side
Official figures out yesterday showed the capital expenditure, which is a big indicator of the strength of the mining boom, is still very strong.

Australian Bureau of Statistics said it expected $119 billion to be invested in mining capital expenditure this year, representing the bulk of an estimated $181.5 billion of investment across the economy.

But Deutsche Bank warns of over-confidence that the investment pipeline is “locked-in”.

The rise and fall of the Dollar
The resources boom has fuelled the two-speed economy pumping up the dollar and in turn hurting manufacturing and retail.

If the boom is over analysts say we’ll see a rebalancing in the economy with other sectors such as retail, manufacturing, tourism seeing a bit of recovery as the resources sector contributes less.

And if it is over…
As history shows after many booms comes a recession. Deutsche Bank analysts are the pessimists predicting a recession for Australia in 2015. But local bank NAB says it’s unlikely that the recent fall in commodity prices will continue and expects prices to level out about now and to rise gradually ahead. Another recent report from BIS Shrapnel says mining investment will not peak until 2014.

Furthermore, resources projects in the pipeline do not peak out potentially until 2015. Planned expenditure on these projects is immense and will drive the overall economy’s growth path ahead. NAB says “those calling the end of the resources boom are likely to be pleasantly disappointed.”

According to a report released by Variant Perception Australia: The Unlucky Country, Australia is a classic dutch disease example where the economy is totally bent out of shape distorted by one sector - similar to Ireland's "Celtic Tiger" with their construction boom.

The report states that Australia will face a run on its currency, a deeper collapse in housing prices and a bank funding crisis as it attempts to come to grips with life after the mining boom.