Mining investment to peak next year

THE Reserve Bank of Australia has credited resources investment for leading domestic growth, but it expects that investment to peak next year – highlighting a more sombre outlook than this time last month.
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RBA Governor Glenn Stevens

Kristie Batten

When announcing a 0.25% interest rate cut yesterday, the RBA said growth in Australia was running close to trend, led by large increases in capital spending in the resources sector.

“Looking ahead, the peak in resource investment is likely to occur next year and may be at a lower level than earlier expected,” RBA governor Glenn Stevens said.

“As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.”

It was a much more bearish assessment than at the September meeting, where the minutes indicated optimism on the investment outlook.

Last month, the RBA said after a surge in investment in the March quarter, the outlook remained very strong, even after BHP Billiton’s shelving of the multibillion dollar Olympic Dam and Outer Harbour projects.

“If the fall in the iron ore and coking coal prices were to be sustained, it could lead to somewhat lower mining investment, but given the large LNG and other mining investment projects already underway, the staff still expected there to be a substantial increase in resource investment over the next year or so,” the RBA said in September.

Macquarie Private Wealth pointed out on Friday that Fortescue Metals Group announced the slowdown in its expansion on the same day as the last RBA board meeting.

“Fortescue announced that it was cutting its planned investment by 25% on the day of the RBA's September board meeting, and several mining services firms have also become much more cautious about the outlook,” analysts said.

“The RBA now places a lot of credence in its business liaison process, and those anecdotes must have been much more cautious over the last month.”

After a 25% drop in August to below $US90 a tonne, iron ore has recovered slightly, but still not to levels seen before the slump.

Iron ore was last trading at $104.20/t.

ANZ Research believes the iron ore price will stabilise and trade in the range of $100-110/t for the rest of the year, rising to $110-130/t in the second half of next year.

Treasurer Wayne Swan yesterday played down concerns over weakening Chinese demand.

“The fact is that for a long time to come China is going to be a very, very important influence on regional and global growth and nothing that I can see in the outlook is going to fundamentally change that medium-term outlook,” he told reporters.

“Yes, there will be changes in the cycle. Yes, there will be some changes in the immediate term, but I think the growth outlook for our region is still one that is very good in the longer term, but nevertheless there will be bump if you like along the way.”

Shadow treasurer Joe Hockey blamed Swan for making the Australian economy more vulnerable.

“The fact is this government is blowing the opportunity of the mining boom – a mining tax slows down mining investment, therefore, we shouldn’t be surprised that the Reserve Bank identifies that as one of the headwinds that we have got to deal with,” he said yesterday.

Meanwhile, the Australian Bureau of Statistics released trade figures for August this morning, revealing that the seasonally adjusted balance on goods and services was a deficit of $2 billion, a rise of $497 million or 32% on the deficit in July 2012.

Exports fell 3% while imports dropped by 1%.

The Australian Industry Group/Commonwealth Bank Australian Performance of Services Index fell 0.5 points in September to 41.9 points, marking the eighth consecutive month of contraction.

The Australian dollar was last trading at $US1.0226.