Australian Metals & Minerals Industry Good for 2007 – Some Worries on Horizon

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Researched by Industrial Info Resources (Sugar Land, Texas). Since early 2004, $25 billion has been invested in Australia’s mining sector. With lead times of three to five years, new projects should come into operation from 2007 onwards. A spate of new production capacity should increase mineral export volumes and increase already record earnings. But the country’s mining industry is expressing some edgy, nervous sentiments about the future when viewing Australian industry’s relationship with the global economy.

On the upside, ABARE’s (Australian Bureau of Agricultural Resource Economics) annual forecast has lifted export earnings for 2006-2007 and estimates an increase of 14% in all commodity exports to $108 billion in the year ending June 2007, with the main market being Asia. The minerals and energy sectors will account for $83 billion, which is up 18% on the previous year. Increased prices are anticipated for iron ore, gold, aluminum, nickel, copper and zinc. The export volumes of these minerals are also expected to rise. These estimates are based on a positive outlook for growth in the global economy in 2007 of about 5% and, of course, the continued onward rush of the Chinese economy.

One factor which could qualify the optimism is the bottlenecking caused by shortages in engineering resources, which has now become a worldwide phenomenon, not only affecting project progress, but leading to very steep rises in project costs from original budgeted figures. Another factor is the potential fall in commodity prices from the dizzy heights they have reached in the twelve months up to September 2006. In September, IMF officials visiting Australia said that commodity prices tend to return to cost over time and they were way above cost at present. Strong demand was expected to continue, but as usual in a commodities cycle, producers increased capacity to meet that demand and that would eventually lower prices, Tim Callen, IMF division chief for world economic studies, told the Sydney Herald.

A review of international commodity futures markets predicts that metals prices will lose 50% of the accumulated gains since 2002 over the next five years. Although the IMF predicts only a mild slowdown for the U.S. economy, they warn that the deceleration in growth could be sharper than expected. A marked fall in U.S. growth would affect all Asian economies and Australia. An IMF official said that they estimated that each percentage point by which U.S. growth slows took up to 0.75% of a percentage point from China’s growth rate.

Brian Fisher, retiring after eighteen years as the Australian government’s chief commodity market forecaster, said that mining companies are still struggling to raise their production levels as shown by ABARE’s tracking over three years into the commodity boom. He told The Australian that what was frightening everyone were the lags in the system and the uncertainty on the demand side. He said that historically, mining booms have ended with a bang. Tending to be short lived, they also tend to come to a nasty end. On this occasion, the nasty end could come as a consequence of panic about the U.S.’s current account deficit. The U.S. consumer is driving the world. In effect, he said, all the money from high oil prices and high commodity prices was searching for a home. The enormous account deficit that the U.S.has been running has been sucking up those surpluses, said Fisher. The supply response to the boom was expected to build over the next twelve to eighteen months. Coordination among governments and monetary authorities could avert a downturn, but a sudden contraction remained a risk, he added.

The IMF’s GDP growth figures for Oceania in 2007 show Australia moving up from 3.1 % in 2006 to 3.5% in 2007, and New Zealand moving from 1.3% to 1.7%. Papua New Guinea, dependant on the minerals boom, moves from 3.7% in 2006 to 4.0% in 2007.

In all the mining and metals forecasts for 2007 there is a bemusing sense of double gut instincts, half at odds with each other. The first says that the good times will continue, sure they need focus and attention to the financial environment, but they will roll on. The second says, maybe now is the time to fold and take a break, but the juices are still running so it could be alright to stay in. No worries mate, forecasting has become like real life. Maybe rather go for place than a win.

Industrial Info Resources (IIR) is a Marketing Information Service company that has been doing business for over 23 years. IIR is respected as the leader in providing comprehensive market intelligence pertaining to the industrial processing, heavy manufacturing, and energy-related industries throughout the world.