XYZ, page-11

Here is something that may be concentrating the minds of some of the shorters:
capex-to-GDP.pdf

I have divided private-Australian-capital-investment-in-the-mining-industry (in nominal AUD) by the nominal GDP (Australia)[#], in the above chart. I don't know how relevant Australian GDP is to the level of mining activity (ie global GDP may be more relevant).

Nevertheless, the numbers are pretty eye popping. I"ll focus here on mining investment in "buildings and structures" alone (this is the segment that has grown to monstrous proportions). As at the quarter ending Dec 2015 (the latest available data), capex in this segment was still running at about 3.3% of domestic GDP. The data indicates that over the years 1987 to about 2005, the level of capex, in this segment, was running at an average of about 0.7% of GDP (!). If the ratio of capex-to-GDP was to revert back to those levels (and I have no idea how likely this is), then that would indicate that the ratio still needs to drop a further 79% from the levels as at Dec 2015 (!). Of course. it is quite likely that current levels have dropped further and are running at something like, say, 3.0%. This would still require a drop, from current levels, of about 77%, to get back to historical levels.

Of course, as this occurs (if that is what is destined to happen) the denominator in the ratio (GDP) will (presumably) keep growing. So if it takes another, say, 4 years for the capex-top-GDP ratio to fall to 0.7%, by that time the GDP can be expected to have grown at annual rates of maybe 3% (perhaps). But that would still require a drop in capex of about 74%, from current levels. Scary stuff.

Of course there are good reasons to believe that not all businesses will be affected equally, and that some may even thrive (comparatively, at least) in the carnage. But I thought I would first try to frighten the living day lights out of everyone, and we can then have that discussion.


[#]: Data from ABS, for both GDP & capital investment.


PS: Incidentally, for anyone with an interest in ONT, I've put out a seemingly concerning chart on an ONT post, that may (or may not) be of interest.