Finance sector downbeat on mining sector

The outlook continues to be gloomy for mining, with National Australia Bank rating it the most pessimistic industry of the economy.

According to NAB’s leading business survey, confidence in the mining industry was -22 in May, well under its long-term average but slightly higher than April.

NAB chief economist Alan Oster said the state of the industry has considerably declined from a level of 12 in April to -10 in May, the ABC reported.

“The pessimism that has crept into the mining sector since mid-last year has become very apparent and persistent, with this industry by far the most pessimistic overall,” he said.

But he added some parts of the sector are still forging ahead, despite sluggish mining investment.

“The big guys, particularly iron ore and LNG, those projects are still going. They’re making lots of money.

“Elsewhere people are pulling back on investment intentions, particularly in smaller miners and mining services.”

The mining sector in Australia is reacting to the slowdown with rigorous cost cutting, job cuts, and putting underperforming assets up for sale.

After Rio announced its cost-cutting measures, BHP CEO Andrew Mackenzie followed suit and announced cuts to spending by 18 per cent in the 2014 budget, with more cuts in the offing in 2015 and 2016.

Between them, the two companies are expected to save $10 billion by slashing operating expenses.

Meanwhile Goldman Sachs has predicted a one-in-five chance of Australia slipping into recession next year as a result of the slowdown in mining investment.

The international investment bank said weak labour demand and an unstable political environment were endangering the economy, according to the Herald Sun.

Goldman Sachs economist Tim Toohey said the risk of the economy falling into recession is at 20 per cent – the highest ‘in the post-war period’, if one does not take into account the financial crisis or other phases of significant economic slowdown.

His report also cites poor business and consumer confidence as risk factors to Australia’s economic growth.

According to the investment bank, the outlook is bleak for the first six months of 2014, with the country’s economic growth rate predicted to slip below 2 per cent.

The warnings come as the Australian dollar slipped to a 33-month low of US93.56c.

Research conducted by Morgan Stanley recently found sudden drops in mining capital expenditure could cause recession in the next 18 to 24 months.

The research blamed Australia’s strong dependence on resources for GDP growth and underperformance by non-mining related sectors, which are not capable of filling the gap.

Goldman Sachs said increasing confidence in the household sector could avoid recession.

Lower interest rates, a lower Australian dollar – around 90c – and better global outlook could increase confidence and growth, Toohey said.

"Much will depend on how quickly business and consumer sentiment responds," he said.

"The housing investment market is just not a big enough contributor to do it alone.

"The biggest risk of sending the country into recession is the consumer continuing to not engage."

Some economists are predicting interest rates may come down to 2 per cent over the next year.

Employment figures out tomorrow are crucial, analysts said.

“A sharp fall in employment would certainly put more pressure on the RBA to cut rates in July,” Macquarie Bank economist Richard Gibbs said.

PricewaterhouseCoppers recently released their 10th annual global report, Mine: A Confidence Crisis, which said increasing costs, lower profits and lower planned capital expenditure all point to a rough road ahead for the mining sector.

The annual report examined the financial performance and status of the global mining industry, which was represented by the top 40 mining companies by market capitalisation.

“The global mining industry lacks confidence about whether costs can be controlled, whether capital returns will improve and whether commodity prices will not suffer a collapse,” PwC Australia’s energy, utilities and mining leader Jock O’Callaghan said.

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