Companies that service the mining sector will be hit hard by a slowdown in commodity prices, but they're well placed to weather the storm, according to the Reserve Bank.
In its latest Financial Stability Review the RBA said a slowdown in the mining sector risked hurting services companies due to their higher debt levels.
The RBA said while services companies had matched the strong profits of miners over the past few years, mining income had “declined sharply” and the earnings of services companies would also be impacted.
“One implication is that some of the newly acquired capital assets of mining services companies might not be fully utilised, which could affect the sector's profits and its ability to repay debt,” it said.
But while there are some risks for services companies moving forward, the RBA said the sector was diversified and would handle weakness in the mining sector.
“Because the earnings of the defined group of mining services companies are not solely determined by mining-related activities, the effect of any downturn in mining investment should be partially mitigated by demand from other sectors,” it said.
“Overall the mining services sector looks reasonably well placed to weather weaker demand for a period and it is therefore unlikely to pose a significant financial stability risk.”
You can read the RBA's full Financial Stability Review here. Analysis of the mining services sector starts on page 51.