INTRODUCING PROJECT MONITOR EDGE

12 June 2013

 

Mining is weakening. And some forecasts of the outlook are gloomy. We examine here what this means for suppliers to the mining industry.

 

And we introduce our new promotional program, Project Monitor Edge, which aims to assist suppliers in this new climate.

 

Two gloomy forecasts

 

Committed investment in mining in Australia "has peaked". And by 2017, the stock of committed investment "will be at levels comparable to 2007".  These are the most recent forecasts (April 2013) of the Bureau of Resources and Energy Economics (BREE), an Australian-government agency. 

 

With the value of committed investment in mining having increased ten-fold in the past five years, BREE is forecasting a big drop. 

 

Economist Ross Garnaut is similarly pessimistic, stating in a speech last month that "mining investment (in Australia) will return to its historic average of around 2% of gross domestic product (GDP)", from around 8% today.

 

How should such forecasts be treated?

 

Such forecasts should be treated with caution.  

 

In the case of BREE, its 2013 pessimism follows hot on the heels of its 2012 optimism.

For example, in March 2012, it stated that, over the following five years (2012-2017), "growth in the Australian economy is expected to be supported by mining-related activities" and that "high levels of mining investment are expected to continue".

 

In September 2012, it more-or-less repeated this view, stating that "high levels of mining investment are expected to continue for some time to come".

 

The 2013 forecasts are based on an assessment of current projects not yet at the committed stage and on the barriers to future investment imposed by "rising construction and operating costs, a moderation in commodity prices" and "increasing investment options in other countries".

 

But these things will change, with as-yet-unknown new projects to emerge and commodity prices to move in as-yet-unknown directions.

 

So what of 2014's forecasts? Or those of 2015? They are likely to be different again.  

 

In the case of Professor Garnaut, his forecast about the nature of future Chinese growth is based on the assumption that Chinese growth will be "much less metals- and energy-intensive" than it has been in recent years, with this in turn based on the assumption that China is making the transition to a "low-carbon economy".

 

This latter assumption is based mainly on what China is saying. What it will do remains largely to be seen. 

 

For example, as part of its stated plans, China has put a cap on annual coal consumption (4.1 billion tonnes as from 2015, marginally above today's level).

 

But in a report released on 4 June (China: the illusion of peak coal), international consultancy firm, Wood Mackenzie, expresses the view that "China's strong appetite for thermal coal will lead to a doubling of demand by 2030", to 7 billion tonnes in total.

 

That is, it does not think that the cap will work. Why? Because it will require "a significant increase in the availability of natural gas", which China "will struggle" to achieve. And because "it will come at a cost to provincial economies" (notably in the west and centre), which will not be allowed to happen.  

 

Brave is the person who, on the basis of such uncertainty, can make a precise forecast of the impact of China's future growth on Australia's mining industry ("mining investment will return to its historic average of around 2% of GDP").

 

These two examples point to the strengths and weaknesses of forecasts.

 

Forecasts are often qualitatively useful, in that they can point us in the direction of change – in this case, the weakening of the mining sector.

 

But they typically don't tell us with any accuracy where we are going to end up – that is, they are typically not quantitatively useful.

 

Given the number of unknown variables built into quantitative forecasts, this is not surprising.

 

The implications for mining suppliers

Both BREE and Professor Garnaut may turn out to be correct, but our inability to know now if this is the case means that their forecasts cannot sensibly be the basis for company strategies.

 

Much better is a policy of risk management. This may be along the following lines: 

- mining is weakening, but it is not collapsing; projects are going ahead and operating mines continue to purchase products and services 
- treat quantitative forecasts with caution, particularly those relating to some years ahead
- continue to put an effort into mining, but with a greater eye on the cost of doing so than has been necessary in recent years
- where possible, diversify beyond mining, into other sectors (e.g. oil and gas, water, transport) and/or other countries (e.g. Indonesia, Philippines, Papua New Guinea)

Project Monitor Edge

 

Project Monitor Edge is an email promotional program that aims to assist you with this process. It puts suppliers in front of specifiers and purchasers in engineering sectors. We start with mining (July 2013), to be followed by oil and gas (September 2013) and then other engineering sectors (September-December 2013).

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Project Notes is issued fortnightly.

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