Malaga - I know its been a while and I promised you some graphs. These aren't quite the Rockingham ones I promised you, but these charts should be enough to leave some property punters awake tonight.
So as you recall a couple of weeks ago I posted this wonderful chart produced by our friends at Westpac which showed the future CAPEX for the nation over the coming period.
Now, ANZ has come out today with its Major Projects Update for March and not only confirmed Westpacs horror story, but are even more bearish. Now this isn't some press release from a Tin Foil Had Brigade, this is a major big 4 financial pillar... The report's opening line:
MAJOR PROJECTS PIPELINE REVISED LOWER AGAIN: MINING AND RESOURCES INVESTMENT EXPECTED TO DECLINE SHARPLY FROM H2 2014
We have again revised lower the potential pipeline of major projects in Australia to AUD440bn as at March 2013 from AUD474bn in October 2012 and AUD498bn in July 2012. These downgrades reflect the additional cancellation and indefinite delay of a number of uncommitted projects, in the mining and resources sector. A considerable degree of uncertainty remains for currently uncommitted projects with only 60% (i.e. AUD270bn of the AUD440bn total) of the potential pipeline either committed or already under construction.
An estimated AUD75bn of mining projects have been removed from the potential investment pipeline over 2013-2016. However, these downgrades have been partially offset by the addition of some new projects to the pipeline, as well as cost upgrades to existing projects, particularly in the LNG sector. We now expect overall mining and infrastructure investment to peak around the middle of 2013, remain at a relatively high level until the end of 2013, before declining. We expect that investment in the mining and resources sector will decline particularly sharply over the second half of 2014 and 2015 and at a somewhat quicker pace than the RBA is currently anticipating, underlining the importance that other sectors of the economy strengthen over the next 12-18 months.
Investment in Western Australia is likely to decline more quickly than in Queensland, mostly due to the differing capital expenditure profiles for these states’ respective LNG projects.
So... Across the nation this is the now, even bleaker than Westpacs assessment of the nation:
Now, employment ads, a leading indicator of the health of an economy:
Now for the WA Property Bulls:
Investment in Western Australia is likely to remain elevated until the end of 2013 due to additional work on both the Gorgon and Wheatstone LNG projects as well as a number of smaller iron ore projects. At present, our estimate of the total potential pipeline of major project investment for Western Australia is around AUD160bn across 2013-16, with about 60% of these projects either under construction or committed to. Around 65% of committed investment is concentrated in the LNG sector. How quickly investment activity in Western Australia declines from the end of 2013 will be dependent on whether the 4th train at Chevron’s Gorgon project and the Browse LNG project and are approved. As noted earlier, if the Browse LNG project is eventually approved, it will most likely be developed using FLNG technology. If FLNG is utilised, the benefits to the Western Australia economy during the construction phase of the project would be extremely limited, given that around 90% of the construction would occur offshore.
Despite the strong investment pipeline in Western Australia, a significant number of projects have been either indefinitely delayed or cancelled. This includes BHP’s Port Hedland Outer Harbour Expansion, Woodside’s Pluto 2 LNG project and Mitsubishi’s Oakajee Port and Rail Project. Overall, we would estimate that around AUD45bn of projects have been either cancelled or indefinitely delayed between 2013 and 2016.
So - in chart form, WA Major Projects -
Energy Projects in WA - looks ok for the next 12-18 months.
Now, heres the scary one, the Mining 'boom' quickly turns to a mining 'bust' come christmas this year..
From these charts i see a heart attack style GDP contraction for AUS due to the construction boom coming to a sharp stop. The stuff we are ripping out of the ground wont save us either, 12 month swap prices for Iron Ore are looking very bleak. I know some miners hit trouble making the mine viable below $110/tonne given australia's high costs of doing business.
Also with all those iron ore mines in Brazil and other places around the world scheduled to come online in the next year or so, and with China slowing down expect this pain to get worse.
So what about gold? Well if you believe the paper markets, it doesn't look good for our third biggest export either. However, there is a steep disconnect between the paper gold world which is crashing, and the physical market, where the Perth Mint website is simply overloaded and the queue 12 people deep down at the counter to buy some physical. Yesterday they had sold out of all 1oz cast/minted gold bars, and 10oz and 1kg silver bars. Regardless, take Newcrest Mining for example, a gold giant in the australian market, their cost per ounce for production last quarter was $973. With gold at $1300 or below this makes the margins tight, the investors nervous, and government revenues contract.
Also copper, which isn't doing too well either down from $3.40 to $3.15ish. But I wont get into that.
My point to the bulls is, Western Australia's economy isnt built on retail, it isnt built on manufacturing, its built on resources and construction. And right now, construction on all the charts is showing signs of a tight contraction, and resources are looking toxic too.
We always thought we were different but our ignorance has gotten the best of us. While we were patting ourselves and naming our price when it came to labour we couldn't see past the shortsightedness and now are fast becoming priced out of the competitive global world.
So, before you bulls come back and say there is a disconnect between your 'on the ground' analysis and what the markets are saying. I say yes, you will see the Perth market remain bouyant for around the next 6 months. This is being driven by a few things:
Firstly, your average IP punter has seen the rental yields increase and with interest rates low, and they being none the wiser that these things dont go on forever. This is shown in that investor commitments rose by 2% in February, by 15% over the year, and were at the highest level since February 2008.
This next chart, showing % of financing commitments that is First Home Buyers continues to contract, even WA the bull state is showing a little correction at the top of that curve. Regardless, the two charts show, its investors not FHB driving the market.
All that wish wash from men like Airey preaching 'upgraders' and 'first home buyers lining up' its all hogs wash microeconomic hogswash, IP punters are driving this mini boom.
Further, few people really appreciate how fast the notion of capital flight can occur in an economy. WA will go from a thousand punters a week coming to Perth to a exodus of 1000 punters or more a week leaving Perth when the construction dries up. We can't forget that before Perth became it became boom town, was the backwater of the world with 8% unemployment and a cheap place to raise a family and have a simple life.
So in conclusion, we have had it too good for too long in Australia, we became ignorant that the financial crises that have plagued the world for the past 5 years we were somehow immune from, we were smarter. Well the truth be known, ok we were a little smarter, but in the end, things always revert to the mean. And its our turn to take the pain
Anyone interested in looking at the other states and the full list of cancelled projects, its here
