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Australia’s road to resource riches is proving bumpier than first thought as miners struggle to meet ambitious investment plans, another reason for the country’s central bank to go slow on further interest rate rises.
The Reserve Bank of Australia (RBA) has long assumed it would have to tighten policy to temper inflationary pressures from a mining boom. But the sector’s race to meet red-hot demand in China and India is running into other constraints, from dire weather to a dearth of skilled labour.
“The mad rush to spend is already dissolving into delays and cost overruns, so there’s no way the mining industry is going to meet its investment targets,” said Brian Redican, a senior economist at Macquarie.
A record A$430-billion ($442billion) in resources investment is either underway or on the drawing board in Australia, a real stretch for an economy with an annual output of A$1.3-trillion.
Indeed, some slowdown in spending might not be a bad outcome if it means less upward pressure on prices.
“We may get a longer, steadier boom,” Mr. Redican says. “That should mean the RBA doesn’t have to squeeze the rest of the economy as much to make room for mining. It’s all to the good.”
There was evidence this week that the central bank was aware of the shifting ground beneath miners.
Minutes of the RBA’s June 7 policy meeting showed board members thought it likely that: “capacity constraints would result in delays or cancellation of some of the projects in the earlier stages of planning.”
That seemed all too prescient when Australia’s largest energy firm, Woodside Petroleum Ltd., shocked markets last week with yet another six-month delay to its Pluto liquefied-natural-gas project.
The cost of the project off the coast of Western Australia was further revised up by A$900-million to A$14.9-billion, 25% higher than first planned.
The news drew threats of a credit downgrade for Woodside and stirred rumours of a potential takeover bid from mining major BHP Billiton Ltd.
Woodside blamed bad weather and a design fault for much of the delay, along with a scarcity of labour.
The lack of skilled workers was recently lamented by the chief executive of mining contractor Leighton Holdings, which loses more than a quarter of its workforce every year as staff shop around for ever higher wages.
“They are very much motivated by someone having different conditions -the food’s better in the camp maybe, they serve different beer in the kitchen,” David Stewart told a business lunch in Melbourne. “We can’t have a business where there’s that much movement of people. It’s enormously challenging.”
Australia has around A$200-billion in gas-export projects in the pipeline, and developers such as Woodside, Chevron Corp, BG Group PLC and Santos Ltd. need to move quickly to sign up Asian customers or risk seeing one or more projects fall over.
This was a risk highlighted by ratings agency Fitch.
“Fitch expects funding to become more difficult as projects continue to face cost increases and timetable overruns,” said Sajal Kishore, a direc-tor in the agency’s energy & utilities team. “This may result in a deferral or cancellation of some proposed projects.”
Australia’s central bank led the developed world by raising its cash rate by 175 basis points between October 2009 and November 2010 as the economy recovered from the global financial crisis faster than anyone had expected, but it has since kept it unchanged at 4.75%.
Minutes from the last board meeting released Tuesday showed members felt a further rate rise would likely be needed at some point but there was no urgency for such a move, particularly given downside risks to the global economy such as Greece’s festering debt crisis.
A private gauge of consumer prices, meanwhile, pointed to a slight easing in inflationary pressure in May, while underlying inflation remained well contained.
The slippage in mining investment is already evident in data from the government statistics office, which regularly polls firms on what they expect to spend for the year ahead.
In the current financial year to the end of June, mining companies alone had planned to increase capital spending by 45% to a record A$51.3-billion. But, barring a miracle, spending now looks unlikely to top A$45-billion.
That in turn casts doubt on the even more ambitious spending plans for 2011/12, where firms were forecasting a 62% rise to no less than A$83-billion.
At the same time there has been a marked pullback in investment plans outside of mining. Manufacturers, for instance, had expected to increase spending as much as 20% in 2010/11, but now look set to spend only 5% more.
Spending intentions for 2011/12 have also been pared back in the face of a high local dollar and a newly cautious consumer.
This turnaround was noted by RBA governor Glenn Stevens last week in an otherwise upbeat speech on the economy, and was seized on by some analysts as another reason to go slow on further policy tightening.
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