Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), & CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

5 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he's one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written, yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data & charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, author of the New York Times bestsellers 'End Game' & 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - author of Things That Make You Go Hmmm, one of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, 'MacroBusiness'.

Monday, 31 October 2016

Mining investment downturn 80pc complete

Mining investment decline - not far to go?

The ABS figures showed that by June 2016 mining investment had tumbled from its peak of 9 per cent of GDP, to just above half of that level.

Of course, November is now hard upon us, so the 2016 financial year is receding into the rear view mirror, and in fact we're well on our way to half way through financial year 2017. 

The good news is that the downturn is now an estimated 80 per cent complete, and the world has not ended.

In fact, the economy grew by 3.3 per cent in 2016. 

If you go back far enough mining investment accounted for a bare fraction of GDP.

And as recently as 2005 the share remained under 2 per cent, so arguably the mining downturn could have further to run than its final 20 per cent.

But, on balance, probably not.

The trajectory will more likely run something like the figures I've projected below, with the downturn more or less finishing over the next 12 months, and the outlook for Australia's economy improving thereafter.

Base case

Back in 2013 a number of financial institutions released their scenarios for mining investment.

The "high investment case" profiles saw investment remaining elevated at 6 per cent of GDP for years and years to come, so we can obviously throw that scenario in the bin.

Interestingly, the most doom-laden forecast came from an ultra-bearish ANZ, suggesting that mining investment would already have slumped to 2 per cent of GDP before now, which obviously hasn't transpired either.

The mid-range or central cases, naturally enough, envisaged mining investment tracking in between the two extremes. 

Both Deloitte Access Economics and Treasury suggested that a range of 4 to 5 per cent of GDP right through until 2023 could be a sensible base case scenario.

Looking at where things are at today, the likely actual answer is that mining investment will eventually sink below 3.5 per cent of GDP, but perhaps not by that much. 

Holding up?

A sensible question to ask here would be: why shouldn't investment fall as low as it was before the start of the resources?

Firstly, and perhaps most obviously, because Australia's key commodity prices - iron ore, coal, LNG, gold, crude oil - have all seen a substantial rebound, and mining job advertisements are already now rising again according to Commsec.  

Secondly, and maybe less obviously, with resources exports hurtling up towards $50 billion per quarter, even the existing projects will require billions of dollars in investment simply to maintain throughout at record levels.

In particular, iron ore export volumes - which are presently tracking at just shy of a massive 200mt per quarter, about four times the volumes seen in 2003 - are forecast to surge considerably higher still over the next half decade, and that alone will require billions of dollars of investment in the Pilbara as ore bodies are depleted.

And then LNG investment will eventually come back into the frame, although not for a few years.

For these reasons, investment is likely to continue accounting for a greater share of the economic pie than was the case before the resources boom kicked off. 

Deloitte Access Economics estimates that the pipeline of definite projects under construction and committed is now increasing again, albeit slowly, to the highest level in nearly two years.

Meanwhile a lift in public sector capex and non-residential construction will also help to offset the last of the mining downturn to some extent.

Overall, there is a bit of a way to go as some of the massive gas construction projects approach their production phase.

But the end of the major downturn is in sight, possibly even within the next year, which is great news.