At a time when our governments, State and Federal, would like to think of more ways to tax the mining sector, we are starting to see reports of a downturn in activity. It was always understood that, as mine’s move from the development phase to the operational phase, the number of workers would decline.
However, reports coming through in the past month starting to paint a picture of cost-cutting and deferment of plans or projects, as miners continue to blame the high cost of doing business in Australia. The high dollar is also quoted as a problem, though the recent 5% decline in the dollar exchange rate should help somewhat.
In Western Australia in the past weeks, we have started to see reports of a sudden decline in job advertisements, in miners deferring employment recruitment plans, and in downstream roles related to exploration being cut.
This is anecdotal, but my neighbour Ian, a marine geologist, tells me this week that he is unemployed, with their company having gone from a phase in which they were frantically busy doing exploration in the sea off Australia and PNG, to finding that the miners have suddenly cancelled all survey instructions. The company blames offshore marine contractors who, according to my neighbour, pay wages at one quarter of the Australian rate. If that is correct, a mere 5% decline in the exchange rate will not correct that, but it is an indication of the problems we face.
Now the company Transfield Services reports in the Financial Review today that cuts in maintenance work on resource projects hit a crescendo over the last 6 weeks. According to chief executive Graeme Hunt, “in mining anything that is discretionary has been turned off or closed down”. Transfield joins other contractors in issuing profit warnings as resource companies postpone projects. Maintenance work is normally regarded as immune to cycles, since equipment needs to be maintained, so the deferment of such work is being seen as an indicator of the stresses that miners are currently facing.
What does all of this mean for Australia and our property sector?
Western Australia is already feeling the impact of these cuts, as employment prospects are certainly weaker, and this may hit the high wages of mining workers. It is early days yet, but property in the north-west has been enjoying extremely high prices, and is vulnerable to a collapse in prices if a severe downturn in the mining sector occurs. The same applies, to a lesser extent, to Perth, where house prices are still expected to increase, but the expected rate of increase may decline to be not much above the inflation rate in the short term. The penny has not dropped in the Perth housing market yet, and we expect it to remain strong into the Spring, but after that we will want to see the state of the mining sector.
Darwin has enough projects under way to maintain its strength for the time being.
Queensland is an interesting one. The decline in coal prices is adding to resource sector woes, and Queensland always seems to be waiting for a boom that has never quiet started yet. These changes may threaten proposed projects and curtail the size of others, giving the State further headaches on top of the existing budget woes.
For some time, both Treasury and the Reserve Bank have been highlighting the need to kickstart the nonmining sector, as a source of growth when the mining boom fades into more normal growth. Quite how we kick start the nonmining sector is still open to discussion, but it seems that this need will appear much more quickly than might have been expected a couple of months ago.
Transfield share price, courtesy of Sydney Morning Herald