Mining production to soar over next 5 years

A report has given a very positive outlook for the sector; should you be buying shares?

A new report released by economic forecaster BIS Shrapnel suggests that an increase in Australian mining production could continue to drive economic growth and will offset some of the negative effects of a decline in investment in the sector.

The forecaster believes that mining production could increase by as much as 41% over the next five years, which is a reasonable estimate considering the projects being undertaken by companies such as BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG), which are all heavily increasing their iron ore output.

Adrian Hart, head of infrastructure and mining at BIS Shrapnel, said, “The growth in the mining part of the Australian economy is being driven by production from here… It’s going to more than outweigh the detraction caused by a weaker construction and investment profile.”

The report also suggests that mining activity as a portion of Australia’s gross domestic product will climb to around 20% from 18.7% today.

However, whilst output will continue to increase as miners anticipate strong demand for commodities to continue, jobs will also be lost in an effort to increase productivity and reduce costs. The report estimates that mining investment will fall by 20%, as well as a 40% fall in buildings and structures activity.

Shareholders of mining companies have pressured for lower costs in order to improve long-term sustainability and, unfortunately, many workers’ positions will be reevaluated moving forward.

Foolish takeaway

Many analysts have been bearish on the mining industry and expected demand from growing economies, such as China, to slow. However, demand remains strong and some commodity prices, like iron ore, remain higher than what most had anticipated.

It could certainly be argued that the outlook for the sector is looking much brighter than it was earlier in the year, and shares could very well rise in value from where they sit today. However, there are still significant risks facing the industry and investors must ask themselves whether they want to expose their portfolios to such risk, or if another sector may be a safer choice.

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