WITH declining commodity prices and rising costs creating a challenging investment environment, the Bureau of Resources and Energy Economics (BREE) has predicted Australia is unlikely to see a repeat in the high levels of investment experienced in the last five years. Instead it suggested that production would boom, with investment likely to decline in the medium-term.
Even accounting for the cyclical nature of commodity prices, BREE stated it was unlikely that prices would rebound to the very high levels experienced at the peak of the most recent mining boom.
The Resources and Energy Major Projects report, a biannual snapshot of the stock of investment in Australia’s resources and energy sectors, provided a projection of the capital stock of expenditure over the medium term.
“Over the past decade, Australia has seen a rapid escalation in investment in resources and energy projects fuelled by higher global commodity prices,” the report stated.
“In this time we have seen the emergence of ‘mega projects’ – projects valued in excess of $5 billion – which have accounted for more than 50 per cent of the total value of investment over the past decade.
The global surge in investment in resources and energy was threatening to catch up to, and in some cases exceed, the demand for commodities, leading to a softening of commodity prices.
“Combined with rising costs this has seen a decline in the number of projects coming into the investment pipeline in Australia. In addition, we have seen a rise in the number of projects being delayed or changing scope as proponents consider their options.”
According to the report, there were 63 projects worth a combined $240 billion listed in the committed stage as of October 2013, compared to 73 projects valued at $268 billion six months earlier.
“The fall in both the number of projects and value is the result of more projects moving to the completed stage, specifically high value ‘mega projects’, than being added.”
The number of projects at the publically announced stage has fallen by 21 since April, with value decreasing by between $12 billionand $19 billion.
“While the number of projects at the committed stage contracted, the six months to October 2013 saw 18 projects completed at a record $30 billion,” BREE deputy executive director Wayne Calder said.
“The projects completed over the past 12 months have added considerably to Australia’s production capacity and will support strong commodity export volumes into the future. Australia is now seeing a transition from the investment phase of the resources boom to the production phase.”
The report reiterated the previous prediction that the value of existing committed projects was projected to decline rapidly in the next four years, with the completion schedules of large LNG projects.
“As outlined in the previous Resources and Energy Major Projects a substantial number of the high value projects that would have sustained the record levels of investment in the resources and energy sectors have been either delayed or cancelled,” it stated.
This trend appears to be continuing and an additional 71 projects in the planning stages of the investment pipeline have been delayed by a year, or more, in the past six months.
“The latest cycle of investment in the resources and energy sector therefore appears to have peaked; however, with over 250 projects still being planned there is the potential for a rebound in investment over the outlook period in the right commercial and market conditions.”
However, the research showed the pipeline of new projects approved for development had dramatically decreased. Only five projects, with a combined value of $1.7 billion, were approved for construction in the last six months – the lowest level recorded by BREE in a decade.
However, an opportunity remained to sustain higher levels of investment, should projects at earlier stages of development proceed through the pipeline.
“In assessing the current downturn in the resources and energy investment cycle it is important to remember that while this signals a potential end to the investment phase of the mining boom, the transition to the production phase is only just beginning,” the report stated.
“During the 12 months to October 2013, the value of completed projects was a record high $45.7 billion. In the past 12 months there have been production capacity increases of 108 [million tonnes] per year of iron ore, 13mt per year of coal, 182 petajoules per year of gas and 1.2 million ounces per year of gold. With further production capacity of 126mt of iron ore, 60mt of coal and 61mt of LNG still under construction, there is still substantial growth to come in Australia’s output of mineral and energy commodities to come.
“While the capital inflows associated with investment phase of the mining boom have brought substantial economic benefits to Australia they are realised over a relatively short period of time. The economic benefits of the production phase may not be as large as the investment phase per year, but they are expected to last for considerably longer.”