bly sp will go lower

CONFIDENCE in the mining sector is in "free fall", with top executives displaying a gloomy outlook and slashing capital expenditure, an influential report has warned.

The 2013 Mining Business Outlook report by Newport Consulting has revealed a sharp negative shift in sentiment among industry leaders over the past year. It is also the first time in the report's four-year history that miners have declared they are reducing capital expenditure -- not just postponing or moderately increasing it.

A key driver for the spending halt was the uncertain economic climate. The report warned that if that hold on investment continued, Australia would reinforce its status as a less attractive investment destination.

David Hand, managing director of Newport Consulting, said a year ago miners had just realised that commodity prices had come off and that their business models were in trouble.

"There was always that statement that if commodity prices came back they will be OK. But a year has gone by and commodity prices have not come back," Mr Hand told The Australian.

"Many of them now believe it is a survival issue, and unless they can get their costs under control they will start shutting their mines."

The renewed focus on costs meant miners were now "talking tough" with suppliers. Mr Hand warned that if the service providers wanted to keep mining clients they had to "get real". He outlined that inflation in the resources sector over the past 10 years had far outstripped CPI.

"Mining companies are talking tough because of the real challenge that if they do not get their costs down they will not be in business," Mr Hand said.

"The service companies have enjoyed the benefits on the way up, and they can share some of the pain and get onboard to support the sector on the way down."

The negative outlook was evidenced by 44 per cent of those interviewed saying they were reducing capital investment -- the first time in the report's history they have definitively stated that they are reducing spending.

In the past, spending has either stayed the same, or increased moderately or sharply.

Of those surveyed, 42 per cent declared that they would not increase spending at all, an increase of 24 per cent on last year's report.

"The story of the last 10 years has been that demand has been massive; prices have been high so the clear strategy has been about adding capacity but clearly that has stopped now," Mr Hand said.

"The investment in huge projects was going to stop one day when capacity required was reached. We have arrived at that some years earlier than many anticipated and that has caused some pain."

The annual report, which draws on in-depth interviews with 60 mining executives from a range of private and publicly listed companies, concluded miners feared what the future held. The general sentiment in the report was that it was hard to source development funds and companies were now focusing on maximising operational efficiencies.

Productivity was an area that the sector had neglected in the past 10 years, Mr Hand said. "When prices are high you need that extra tonne and the easiest way is to borrow more funds and dig another hole," he said.

"Because the dollars aren't flowing and new holes aren't being dug, the task is now to come back and look at operations they have and run them well. There is this enormous focus that has now shifted to cost control and productivity . . . these are the things mining executives today are now focused on."