The mining boom has two years left to run, according to a Deloitte Access Economics report released this morning.
Falling commodities prices are mostly to blame with iron ore falling below US$130 a tonne while spot thermal coal prices are US$87 a tonne, which means some miners may struggle to break even. Commodities prices are down as China slows its economy, where new home sales have slumped and growth in industrial production has fallen. The Aussie dollar could slide towards 80 US cents as iron ore and coal prices fall further.
Deloitte Access Economics director Chris Richardson also warns that the boom in mining construction could slide sharply from 2014 as cost pressures bite. Fewer mega-projects are being approved, with the current projects underway approved some time ago. BHP Billiton Limited (ASX: BHP) has cut back on its massive capital expenditure program, saying that no major projects will be approved before December 2012. Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group (ASX: FMG) have announced a slowdown in their expansion, but expect this to be revisited. The share prices for all three were down at lunchtime today, with BHP and RIO falling 3%, while Fortescue has crashed 5%.
It could be tough times ahead for pure iron ore miners and other non-diversified miners. Fortescue and Australia’s fourth largest iron ore miner Atlas Iron Limited (ASX: AGO), are both pure iron ore miners, and could see their shares dumped. Still, if commodity prices fall further, today’s prices could appear expensive. Coal miners could also be in trouble, with some of Australia’s biggest, including New Hope Corporation (ASX: NHC) and Whitehaven Coal Limited (ASX: WHC), likely to see falling profits. Rio and BHP also have significant exposure to coal. In a potential sign of things to come, Atlas shares have fallen 5%, New Hope slides 0.8% and Whithaven has lost 2% in trading so far today.
Nathan Tinkler’s takeover of Whitehaven could end up as a mistake. With a large chunk of debt likely to finance the takeover of Whitehaven, the company could see itself caught in a deadly triangle of low coal prices, potentially higher production costs and high levels of debt.
BHP better placed than most
BHP Billiton may be better placed than most, given its greater diversification and lesser reliance on China than others. The company earns a significant amount of revenues from oil and gas and has expanded aggressively into shale gas in the US. BHP spent more than US$20 billion in 2011, acquiring shale gas assets, including buying Petrohawk Energy and assets from Chesapeake Energy. At the time, the company was derided for what looked like an ill-timed purchase.
In good news for the company, gas prices in the US have risen by 50%, having seen prices fall from US $4 per million british thermal units to less than $2. Prices were last quoted at US$3.08 and BHP may yet be vindicated for its purchase.
Analysts are still expecting BHP to write down the value of its Petrohawk assets by at least $2 billion, when the company reports its 2012 earnings next month.
The Foolish bottom line
The report did outline one good sign – lower interest rates could follow as Australia’s economy slows, which may be good news for other sectors of the economy that are currently suffering, such as retail and media. If commodities prices fall, the Australian dollar could also fall, which may partially offset the lower commodity prices, but it’s certainly not something to rely upon.
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Fool writer/analyst Mike King owns shares in BHP. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.