August 25, 2012
That Was The Week That Was ... In Australia
By Our Man in Oz
Minews. Good morning Australia. Did your mining boom really come to an abrupt end last week, as has been reported?
Oz. It certainly took a heavy blow when BHP Billiton canned plans to spend US$30 billion digging the biggest man-made hole in the world at its Olympic Dam copper and uranium mine. But looking past the headlines, it’d be more accurate to say that the boom has ended its first phase, because the underlying driver, demand for minerals, energy and food in heavily-populated Asian countries, has not suddenly stopped.
Minews. How did the market react to the Olympic Dam news?
Oz. Now that’s the more interesting question. The reaction from investors was quite different to news media reports. Immediately after BHP Billiton confirmed the mothballing of its Olympic Dam expansion, which had been widely-expected, its shares rose, as did the rest of the Australian market.
However that upward move was then followed by a sell-off on Friday, which also occurred in China and Japan. As a result most indices ended the week virtually where they started, except gold which had its best five days of trading in months.
Minews. We’ll get to gold later, but first a bit more on the mood in your market, which you say seems to be taking the end-of-boom reports in its stride.
Oz. The thing is, the Australian economy has become over-heated, with too many resource projects chasing scarce services and too few skilled workers. The result has been an explosion in costs. For example, developing a gas export project costs three-times as much in Australia as it does in the US, and double the amount it does in Asia location.
Minews. In effect, Australia has been pricing itself out of the market.
Oz. That’s probably a fair comment, but it only applies to projects with less robust profit margins like Olympic Dam, which has uranium in its copper ore and hence needs additional processing.
But meanwhile, in the iron ore space, BHP Billiton shelved a US$20 billion plan for a new harbour. It will now implement a less costly alternative, which will involve building two new export berths the existing Port Hedland harbour. The grand plan has been mothballed for now, but expansion continues nevertheless.
Minews. So, the boom continues but at a slower pace.
Oz. A more manageable pace, yes. We will see more projects mothballed, especially in coal, where prices have fallen sharply. But there will be plenty to get on with in iron ore, copper, gold, and the latest hot sector, oil and gas, which is becoming rather exciting down this way thanks to the discovery of thick beds of gas-rich shales, which look strikingly similar to the structures which have revolutionised the US energy sector.
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