Here's why you must avoid Australia's mining services providers

If you needed further proof that Australia's mining boom has come to an end, you need only read this alarming quote from the Fairfax press on Wednesday, which doesn't bode well for companies like Cardno Limited (ASX:CDD) or Monadelphous Group Limited (ASX:MND).

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If you needed further proof that Australia's mining boom has come to an end, you need only read this alarming quote from the Fairfax press on Wednesday:

"After a collapse in prices from oil to iron ore, the value of the nation's approved and financed mining and energy projects is forecast fall to about $15 billion in 2017, from $226 billion at the end of April."

Indeed, the writing has been on the wall for a long time. At the same time as demand growth from nations such as China has been declining considerably, the world's largest producers of major commodities have been moving in the opposite direction.

That can be said of BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Brazil's Vale in the iron ore market, which have all ramped up their production rates. Meanwhile members of the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC countries (including the United States) are to blame for the tidal wave of excess supplies in the oil market. Notably, coal prices also remain heavily depressed while there are big question marks over the role it will play in the generation of energy in the future.

Although most commodity producers are willing to state their expectations of more favourable market conditions down the track, most are also losing the confidence necessary to justify new projects, as highlighted by the quote from Fairfax included above. BHP, for instance, recently said that it would slow-down its iron ore expansion plans while various energy producers, including Santos Ltd (ASX: STO), have also been forced to shelve theirs.

Indeed, the federal government recently forecast that investment in the sector would slump by 26% during the 12-months ending 30 June, 2016, and another 31% in the following 12-month period. Given the uncertainty facing the markets, pumping the breaks on certain projects is a wise move, and one that investors will likely respond to favourably (or, at least not so negatively). But a lack of capital expenditure could also impact their overall returns in the coming years, highlighting the cyclicality of the sector.

While the slowdown is bad news for the miners and producers themselves, it is perhaps even more so for Australia's various mining services companies, including Cardno Limited (ASX: CDD), Bradken Limited (ASX: BKN) and Monadelphous Group Limited (ASX: MND), to name just a few. As the miners attempt to rein in costs, they will increasingly take their services roles in-house, meaning less demand for outside service providers.

Despite the fact that each of these companies have plunged from the highs they achieved in years gone by, they all remain extremely risky bets considering the strong headwinds facing the sector.

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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