Tag Archives: capex

Capex holds up

The results of the private capital expenditure survey for the September quarter were released by the ABS this morning, showing a seasonally-adjusted .2% rise, in volume terms, on the June quarter. This solidly beat expectations for a 1.9% drop.

In dollar terms, capital spending by the mining sector dropped 3% over the quarter and manufacturing fell 1.3%, with these falls offset by a 5.6% jump in ‘other selected industries’. Total capital spending was down 4.6% ($1894m) on the same quarter last year, mining was -14.2% ($3475m), manufacturing -10.5% ($253m), and ‘other selected industries’ +12.8% ($1833m).

TotalCapexSept14

The main driver of capital spending by ‘other selected industries’ over the past year has been the ‘rental, hiring and real estate services’ industry grouping, which has risen by 40% and contributed $838m of the $1833m in additional spending by that sector. Contributions have also been made by businesses in ‘retail trade’, ‘construction’ and ‘financial and insurance services’.

CapexOther1

CapexOther2

Those industry groupings cover businesses benefiting from the last monetary easing cycle and the consequent boom in house prices. Unsurprisingly, seeing as it’s the nucleus of the boom, NSW has accounted for over half the increase in capital spending by ‘other selected industries’ over the past year.

Here’s the division of total capital spending by state.

CapexState

Evidently, the cyclical boost emanating from the Sydney property sector and the resilience of mining investment in WA have cushioned the overall blow to capital spending in the past year. The latter of those points is important. If capex holds up in WA, it’ll come at the expense of the iron ore price, since capital spending in WA is almost entirely constituted by iron ore capacity expansions.

Here are the expectations for capital spending this financial year:

Mining 

Screen Shot 2014-11-27 at 4.49.33 pm

Other Selected Industries 

Screen Shot 2014-11-27 at 4.49.43 pm

Manufacturing 

Screen Shot 2014-11-27 at 4.49.37 pm

Manufacturing is all but dead so we can ignore that until we see the dollar fall 20-30% in real terms.

Without further cuts to interest rates, the cyclical upswing in NSW is likely to run out of puff over the next 6 months or so, in which case I wouldn’t be surprised to see expected spending by ‘other selected industries’ moderate somewhat by the time the full year’s spending has been recorded. Activity in this interest rate-sensitive space reflects the RBA’s strategy for ‘rebalancing’ the Australian economy as the resource sector slows. This is bubbly economics: papering over a structural downturn with a cyclical upturn in borrowing, asset speculation and consumption. The US famously tried this strategy after the tech wreck early last decade, and it ended up with a catastrophic housing bust.

Thankfully, Australians have mostly kept their heads so far, and the bubbliest segments of the economy are confined to Sydney property speculation and manic Melbourne apartment building. Credit is not growing too rapidly and household savings rates remain reasonably healthy (bearing in mind, of course, that households are already heavily indebted). Nevertheless, the bubbly segments have lately caused enough consternation within the RBA and APRA for these institutions to move forward with ‘macroprudential regulations’, specifically aimed at reducing macroeconomic risks in the property sector and banking system. Despite having cheered it on, the RBA finally grew wary of the housing beast.

It remains to be seen how stringent macpru ends up being in Australia, but it is a welcome move. Some commentators will be inclined to regard this upturn in housing-related activity as healthy rebalancing, but in my view a structural downturn needs a structural remedy, not a temporary sugar hit. We need a lower real exchange rate and productivity-enhancing reforms and infrastructure spending to boost investment in non-mining tradable goods industries. Until we get that, it’s hard for me to get excited about any purported ‘rebalancing’.

As to mining investment, there’s little doubt that we’re going to see it deteriorate sharply over the next two years, particularly given the recent carnage in iron ore and crude oil prices (which LNG prices are linked to). The BREE recently published its forecasts for mining projects.

Screen Shot 2014-11-27 at 5.02.32 pm

It’s safe to say that ‘possible projects’ are extremely unlikely, and also that many ‘likely projects’ will fail to break ground as well, without big rebounds in oil and iron ore prices, or a sharp fall in the Australian dollar.

Bonus Chart

CapexMining

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Straya T’day 1/10/2014

National Day brings peace and quiet…

…unless you happen to be occupying Central, in which case you’re embroiled in the thick chaos of rebellion.

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For Aussies at least, China’s National Day holiday week offers a welcome respite from the daily torment inflicted on us by the Chinese commodities exchanges.

So no iron ore or steel news today; for once this Straya T’day post will be all-Strayan.

Retail sales miss

Retail sales for August came in lower than expected, printing a 0.1% seasonally-adjusted gain over July, on expectations of +0.4%. Retail turnover was 5.1% higher than August last year. The respective trend figures were +0.2% and +5%.

The yearly gain in sales still looks fairly healthy. (Both charts use trend data.)

RetailSalesAug14yoy

However much of this strength reflects the surge in the latter half of last year, which is still ‘passing through the snake’.

Monthly figures have been subdued for most of this year.

RetailSalesAug14mom

The budget didn’t do much for consumer sentiment, and this has no doubt been a key factor in households’ reluctance to loosen the purse strings. It may also be a function of the deteriorating outlook for iron ore, which has been reported more widely and with an increasing acceptance that the situation is not likely to improve materially in the foreseeable future, other than perhaps a tepid restock in Q4.

Manufacturing PMI surprises

In fairness, Australia’s manufacturing PMI surprises me with every release, since its very existence implies that manufacturing has survived another month.

It’s pretty bleak reading, although that’s nothing out of the ordinary. Until Australia’s real exchange rate significantly devalues, there’s little hope of a broad-based revival in business expenditure in the manufacturing sector.

Mining capex unwind is upon us

Along with retail sales, the ABS released quarterly data today on engineering construction work, which is an important measure of mining investment activity. Combined with the flagging terms of trade, the downturn in mining investment is the chief headwind facing the Australian economy over the next couple of years.

Overall, the value of work completed declined 2.2% in the June quarter from March. The value of work completed by the private sector declined 1.9% to $23,130m.

EngineeringWorkDone

So far the descent has been fairly smooth, however this is set to steepen rapidly over the next 6 to 12 months.

EngineeringWorkPipeline

Of course, all this investment is going towards substantial increases in Australia’s export capacity, primarily in LNG. So will the decline in investment give way to a boom in exports, such that the net impact on the economy is benign?

Not quite.

It’s important to remember that Australia’s mining boom over the last decade has been enriching beyond precedent because it was a boom in profits. So despite the vast majority of Australia’s mineral resources being owned by foreign interests, the profits generated by these firms greatly increased company tax receipts and royalties revenue, much of which was then passed on to households in the form of tax cuts and transfers. Booming profits also saw wages in these industries skyrocket, providing another conduit for the windfall to flow into the Australian economy.

The ‘boom’ in LNG exports after the investment phase passes and supply ramps up will be quite different. These mega-projects in Queensland, WA and the NT are going to be about the most expensive sources of LNG on the planet, placing them at the other end of the ‘cost curve’ to Australia’s iron ore majors (see below). This means that current LNG prices aren’t going to deliver the massive profit margins that characterised the mining boom. So although Australia’s export volumes will surge, supporting GDP growth by improving the trade balance, the income effect on Australia will be negligible when compared to the iron ore and coal booms of the last decade.

The gas has mostly been sold on long-term contracts. However, what happens to spot prices once the gas starts flowing remains to be seen. There was already a mini-crash in spot prices this year during the northern summer…

LNG crash

…and yet the ramp-up in Australia’s LNG exports has barely begun.

LNG exports

If spot prices do fall significantly below contract prices, there will be immense pressure on suppliers to renegotiate those agreements.

Here’s where Australia’s LNG projects sit on the cost curve (in orange).

LNG BE

Clearly, if spot prices drop much below the levels they did during the northern summer, and stay there for any length of time, a lot of these projects are going to face serious trouble as buyers attempt to wriggle free of contractual obligations.

Yet another reason why we’re fervently cheering the Australian dollar lower!