The mining industry’s slump has killed projects and jobs across the region, giving Asian importers cheaper prices but damaging the region’s exporters. Yet amid the gloom over China’s outlook, industry analysts say brighter times may lie ahead for the battered sector.
As the world’s biggest resource consumer, China’s economic slowdown has affected mining stocks disproportionately. Chinese manufacturing weakened further in June, with the fastest fall in new export orders since March 2009.
Barclays, HSBC and other analysts have cut their growth projections for China to 7.4 percent in 2013, below the government’s 7.5 percent target, while commodity prices are expected to come under further pressure from concerns over US monetary “tapering”.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Miners have responded by slashing spending, with some A$150 billion worth of projects shelved in Australia alone since April 2012.
On Tuesday, Australia’s new federal treasurer Chris Bowen endorsed Prime Minister Kevin Rudd’s previous comments about an end to the China-driven boom.
“We’ve seen [resource] demand start to moderate, partly due to China’s own economic transformation and the transition they are dealing with. For example, since the [Australian federal budget for fiscal 2014] we’ve seen the price of iron ore fall by around 15 percent and the price of gold by around 21 percent,” he said.
“I agree with the prime minister when he says that the mining investment boom is drawing to an end and we're now transitioning to that production phase,” he added, noting that “managing any transition is always difficult”.
Just how difficult became apparent Wednesday, when comments by the nation’s central bank about “lengthy” board deliberations on interest rates saw the Australian dollar sink to its lowest level since September 2010, while the local stockmarket dropped nearly 2 percent.
Australia’s economy grew at its slowest annual pace in almost two years in the first three months of 2013. Neighboring Indonesia, another major resource exporter, has also suffered the fallout with the World Bank cutting its growth forecast to 5.9 percent from 6.2 percent previously due to weaker exports.
With reduced investment and capital markets tightening, the flow-on effects are being felt among the mining industry. Greenfield exploration in Australia dived 28 percent in the December 2012 quarter, hit by sliding investor confidence.
“The big miners are slashing exploration spending to make their balance sheets look better, while many juniors just can’t raise money. Greenfields exploration is going to shrink because the risk is considered too high,” Nick Sheard, executive chairman of Australia-based Carpentaria Exploration, told The Diplomat.
“The obvious outcome of less exploration is fewer discoveries, so the pipeline of new mines over the next seven to 10 years is going to diminish considerably.”
Tony Fawdon, executive chairman of ASX-listed Diatreme Resources, agreed, saying there could be a major reduction in activity.
“BHP Billiton, Rio Tinto, Newcrest, Anglo-American and others have all made major cutbacks and Barrick Gold is leaving Australia altogether, so that’s a major reduction in exploration. In terms of the 800-odd juniors listed on the Australian market, around half have less than A$250,000 in the bank, so there’s quite a few close to going into administration,” he warned.
Both mining executives urged a reduction in red tape to aid exploration, along with new tax incentives in Australia such as a version of Canada’s flow-through share scheme. However, both pointed to better times ahead, should the U.S. recovery continue and other emerging markets such as India strengthen.
“Everyone talks about China’s downturn, but there’s still an incredible appetite by millions of people joining the middle class, so Chinese demand for metals won’t disappear. Then there’s India, which is expected to have a larger population than China’s in the near future,” Sheard said.
“The U.S. is on the road to recovery and once they do, metals demand will bounce back, with Europe to follow.”
Diatreme’s Fawdon agreed, saying that the mining super-cycle was far from dead.
“The first phase of the boom was pure speculation; the second was where people spent money helter-skelter; and now we’re going into the third phase where we’ll see development taking place.
U.S. investment bank JPMorgan has recently advised investors to buy commodities again due to the anticipated bottoming of global growth rates, mining production cuts and forecast demand growth.
“For the first time in more than two years, we recommend an overweight allocation to commodities…We anticipate that when commodity markets move higher, they will likely move more quickly than seems possible today,” it said.