Contractors to feel brunt of mining investment decline

At an economic outlook briefing held in Perth last week, BIS Shrapnel chief economist Dr Frank Gelber told delegates that weak demand for commodities, coupled with lack of funding from banks, had “slaughtered” the next round of mining expansions. “We have been in a whopping great boom for the last six years driven by the extraordinarily strong minerals investment,” Gelber said. “[But] commodity prices have collapsed, this time as a result of the credit squeeze on the mining sector, and we are forecasting a 50 per cent decline in mining investment over the next two years Australia-wide.“The same order of magnitude is expected here in Western Australia, but over the next three years, so we will be doing half the work done on minerals investment that we are doing now in three years time.” Gelber also warned that investment could fall further if the global economy doesn’t rebound from the downturn sooner.By 2010, BIS is forecasting a 20% plunge in new engineering construction investment and a 19% fall in new non-dwelling building investment with total new private investment tipped to fall 5%.However, BIS also expects strong government investment, tipped to jump 11% in 2010, will partially offset the fall in business investment. Despite the forecast plunge, Gelber told delegates activity in the resources sector was not likely to dry up prior to 2010 as work on existing projects continued to support a high level of investment activity.“The minerals side is still booming, work done is still increasing but that’s the last round of projects that we are still finishing off,” Gelber said.“The next round of projects are delayed, shelved, abandoned. It is evaporating on us.”Gelber also warned that a quick recovery in demand for commodities and a turnaround in prices were unlikely.“Commodity prices will come back, but it is not going to be a quick rebound like some people are starting to say, particularly in the mining area,” he said. “It will come back as we absorb all the excess capacity, but gone are the days of doubling export facilities every three years. “We have been through that and you can’t keep doing that indefinitely. We have increased capacity and demand has fallen away, and now all bets are off.”Despite the doom and gloom, Gelber said it was important for businesses to position themselves for when the next boom begins. “World recovery is still too far away, it is not for a while yet, at the moment we are still trying to work out how bad it is going to get,” he said.“[However] demand doesn’t stay down, it comes back and at that stage we will be more competitive.“The time that you make your money is when prices have overreacted to the bust and you position in for the next [boom].”Last month, Access Economics reported a downturn in investment in the December quarter with the value of Australian projects falling to $607.2 billion from $644.4 billion in the September quarter.A number of major projects have been shelved over the past few months including BHP Billiton’s Ravensthorpe nickel operation in Western Australia.

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