Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Wednesday, 16 March 2016


Mining cliff three parts cooked

The Commonwealth Bank of Australia (CBA) today noted that Australia is an estimated 92 per cent of the way through its commodity price corection, and 74 per cent of the way through its so-termed mining "investment cliff" or "capex cliff". 

The latest available ABS data I have charted below on engineering construction activity only runs to September 2015, but projecting it forward to March 2016, the CBA assertion seems feasible. 

By the third quarter of calendar year 2015, engineering construction had already declined by more than a quarter over nearly three years since the end of 2012.

Although Queensland has already gulped down most of its medicine in this regard, Western Australia and the Northern Territory must still face down the brunt of their respective declines. 

Unfortunately the Commonwealth Bank estimates that only 55 per cent of likely mining job losses have occurred to date, meaning that there is still considerably more pain to come for resources regions. 

The ABS figures for expected mining capital expenditure into 2016-2017 also lend weight to CBA's appraisal, showing a massive 36.2 per year-on-year decline for Estimate 1. 

Financial Year Actual & Expected Expenditure - Mining Capital Expenditure

Source: ABS

That Australia is now close to three quarters of the way through the investment decline is great news, for it means that sooner or later the decline in resources construction activity will cease to act as a drag on economic growth. 

Fitch affirms AAA rating (stable outlook)

In related news Fitch Ratings, which has arguably been the most downbeat of the ratings agencies on banking and housing market risks, after last night's market close affirmed Australia's IDR as a AAA rating with a stable outlook.  

Fitch's reasonings included Australia's low public debt, its strong institutions, and effective governance, noting that Australia's banking system is one of the strongest globally.

In line with CBA's findings, Fitch also expects mining investment to be a smaller drag by 2017, thereby helping to push up GDP growth.

You can read the rest of Fitch's assessment here