Gloom hits services firms as Australia’s mining boom peaks

PUBLISHED : Tuesday, 21 May, 2013, 1:58pm
UPDATED : Tuesday, 21 May, 2013, 1:58pm

A spate of profit warnings from Australian mining services firms suggests the country’s “once-in-a-century” resources spending boom may have peaked sooner than companies, economists and policymakers had expected.

Australia has been bracing for a slowdown in its massive pipeline of investment for resource projects - liquefied natural gas, iron ore and coal in particular - as developments come on stream and as signs of a slowdown in demand from top commodities consumer China weigh on prices.

“The extent of the slowdown and just how fast the turnaround has been is a surprise,” said Savanth Sebastian, an economist at Commsec, noting the potential for more projects to be pushed back or mothballed. “It seems to have taken place in a very narrow window.”

With miners from BHP Billiton down shelving projects and slashing costs that grew out of control during the boom, they have turned the screws on contractors, in some cases dumping firms that are unwilling to cut prices.

“They got carried away using too many contractors to get that extra tonne, almost like a credit-card mentality,” Tony Maher, mining division president of the Construction, Forestry, Mining and Energy Union, told Reuters.

The pain that first hit mining and engineering firms late last year has intensified more than expected, judging by the slew of negative revisions to profit forecasts.

Shares in Transfield Services Ltd sank as much as 24 per cent on Tuesday to an all-time low of A$0.965 after the engineering firm cut its profit forecast by more than a quarter.

WorleyParsons, Boart Longyear, Transfield Services, UGL, Fleetwood and Coffey International all slashed their profit forecasts over the past week, hammering their shares.

Transfield and its bigger rival UGL both blamed volatility in commodity markets and a slowdown of capital investment in resources and infrastructure projects.

Fleetwood, which provides housing for mining camps, plunged as much as 33 per cent to a four-year low after warning there was now an oversupply of housing in one of Western Australia’s resources hubs, Karratha.

Drilling services firm Boart Longyear added to the gloom on Tuesday, citing estimates exploration spending in the mining sector is down 20 per cent from a year ago. As a result, it expects prices for drilling services to fall in the second half of this year.

“The downturn in capital and exploration spending in the mining sector globally has clearly reduced the demand for drilling services and products,” Boart chief executive Richard O’Brien said in a statement ahead of the group’s annual meeting.

Former market darling WorleyParsons warned last week that its profit for the year to June this year would fall, compared with earlier guidance for a rise, blaming not only weaker demand for resource infrastructure in Western Australia but also softer construction activity in Canada’s oil sands market.

WorleyParsons said it was surprised by the extent of the decline, referring to “weaker than anticipated market conditions impacting the second half result.”

Its shares hit a four-year low after the warning.

The sharp slowdown reported by mining service companies has raised the prospect that closely watched capital expenditure data due next Thursday could show the spending slowdown in mining happening faster than previously expected.

The initial government estimate for total capital spending in the this year/14 financial year was A$152.5 billion (HK$1.2 trillion), down about 9 per cent from the latest estimate for the current year, though the numbers are prone to revisions.

The Reserve Bank of Australia, which cut rates to a record low 2.75 per cent this month, said on Tuesday that part of the reason was the slowing in business investment as mining investment peaks.