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FEATURE ARTICLE: MINING CAPITAL EXPENDITURE IN AUSTRALIA
From March quarter 2005 to September quarter 2010, the estimate for capital expenditure by the mining industry increased 258.4% (or $8,034m) to $11,143m.This growth, relative to other industries, can be seen in Graph 2(footnote 3) .
The observed increase in mining capital expenditure, to a large degree, has been driven by the need to develop mine sites and construct infrastructure to service the increasing demand for natural resources by emerging economies in Asia, particularly China. These rapidly expanding economies have dramatically increased their demand for energy and resources to develop their infrastructure and support urbanisation and industrialisation(footnote 4) . Australia is well placed to fulfil this demand due to its resource endowment, stable political environment and geographical proximity to emerging Asian economies.
Coinciding with the increased demand for Australia's commodities have been sharp rises in commodity prices. From March quarter 2005 to September quarter 2010 the export price index for the mining industry increased 150.2%(footnote 5) . The increase in export prices has generated large increases in profits in the mining sector (up 233.3% or $17,438m in the period from March 2005 to June 2010)(footnote 6) . Increased profitability and expectations of continuing strength in commodity prices has provided further incentive for mining businesses to undertake investment. Graph 3 shows the growth in mining profits and export prices, along with the increase in mining capital expenditure(footnote 7) .
Also of note from graph 3 is that capital expenditure is less volatile than profits in the mining industry. Profits are responsive to economic conditions experienced by businesses in the reference period, in particular commodity prices and production volumes. On the other hand, mining capital expenditure is less responsive to current economic conditions as expenditure primarily relates to large projects that require expenditure over a number of years. Therefore, a change in current economic conditions and business outlook is likely to more significantly impact investment/development of future projects, rather than those that are currently under way.
A recent period when mining capital expenditure did fall was during the global financial crisis (GFC).
The global financial crisis was a period from 2008-09 to 2009-10 when many mining businesses faced tightening credit conditions, a fall in export prices on the back of concerns about the global demand for commodities and a fall in profits. The sharpest falls occurred in June quarter 2009, with export prices falling 31.7%, profits falling 27.7% and capital expenditure falling 12.7%(footnote 8) (see graph 3).
The fall in total mining capital expenditure (down 7.4% or -$2,794m from $37,978m in 2008-09 financial year to $35,184m in the 2009-10 financial year) was driven by both equipment, plant and machinery (down 11.9% or -$1,178m from $9,888m in 2008-09 financial year to $8,710m in the 2009-10 financial year) and buildings and structures (down 5.8% or -$1,616m from $28,090m in 2008-09 financial year to $26,474m in the 2009-10 financial year)(footnote 9) . It's clear therefore that mining businesses responded to the GFC by reducing expenditure on equipment, plant and machinery such as earthmoving equipment and mine processing machinery due to flexibility in delivery dates as well as reducing mine development and supporting infrastructure spending.
Graph 4 presents mining capital expenditure by asset type(footnote 10) over time. From March quarter 2005 to September 2010 quarter, expenditure on buildings and structures increased 361.4% (or $6,845m) to $8,739m. The increase for equipment, plant and machinery in the corresponding period was 102.4% (or $1,217m) to $2,405m(footnote 11) .
In recent years, buildings and structures capital expenditure has increased due to a large number of new mining projects in LNG, coal, iron ore and off-shore drilling platforms and now clearly dominates total mining capital expenditure.
An analysis of mining industry capital expenditure shows that for the financial year 2009-2010, 41.6% (or $14,631m) can be attributed to businesses operating in the oil and gas extraction industry and 36.9% (or $12,968m) can be attributed to businesses operating in metal ore mining. Coal mining was 17.2% (or $6,052m) of the estimate, exploration and other services was 3.0% (or $1,046m) and non-metallic mineral mining and quarrying was 1.4% (or $487m)(footnote 12) .
(II)THE IMPACT OF MINING CAPITAL EXPENDITURE ON OTHER INDUSTRIES
The performance of the mining industry in recent years has had positive downstream effects on other industries, both in terms of capital expenditure as well as more broadly in terms of sales, wages and profits.
The resource processing industry (a part of the manufacturing industry) is a clear example of positive downstream effects from increased mining activity. A large proportion of mining related manufacturing occurs in the industry primary metal and metal product manufacturing. This includes businesses carrying out the smelting and refining of raw iron ores (a mining output) into metal products. The majority of these businesses are manufacturing subsidiaries of mining companies. Graph 5(footnote 13) presents capital expenditure for these two related industries over time. It's clear that the initial upswing in mining capital expenditure was matched by capital expenditure in this downstream manufacturing industry. In recent years, though, mining capital expenditure has outpaced primary metal and metal product manufacturing capital expenditure.
These positive flow-on effects of increased mining activity, including mining capital expenditure, also impact businesses not directly involved in the mining commodities production process. This includes construction and engineering businesses who are recipients of buildings and structures investment by mining companies and businesses providing mining support services. More broadly, tax revenue has been impacted by mining activity and employment/wages of employees supporting the mining industry (e.g. cleaners and administrative support services staff) are transferring benefits from the mining industry to the rest of the economy. Asset prices, such as house prices in Perth, are also being affected by the surge in mining activity.
(III) MINING CAPITAL EXPENDITURE BY STATE
The majority of mining capital expenditure in the recent past has occurred in the resource rich states of Western Australia and Queensland. Western Australia contributed 61.5% (or $6,445m) of the total mining capital expenditure estimate in September quarter 2010 and this percentage has been increasing over recent years (see Graph 6)(footnote 14) . Queensland contributed 21.5% (or $2,260m) of total Australia mining capital expenditure in September quarter 2010 and the state has emerged as consistently the second largest contributor. NSW contributed 10.2% (or $1,070m) of the total mining capital expenditure estimate and the remaining states had a combined contribution of 6.8% (or $713m).
These data also demonstrate that Western Australia and Queensland are becoming increasingly reliant on the mining industry for business investment and economic activity more broadly. In the September quarter 2010, 76.1% (or $6,445m) of the total private capital expenditure in Western Australia was carried out by the mining industry. For Queensland, the proportion attributable to mining was 39.6% (or $2,260m).
The importance of the Mining industry to these two states is further reinforced by the growth in Mining Total Factor Income(footnote 15) . In Queensland, Mining total factor income increased 234.2% (or $16,473m) from 2000-01 to 2009-10 while in Western Australia the increase was 244.6% (or $35,711m).
This article provides an insight into the increase in capital expenditure in recent years, utilising data primarily sourced from the ABS Private new capital expenditure and expected expenditure survey. The recent surge in capital expenditure was primarily due to the mining industry, an industry benefitting from high export prices resulting from strong global demand for mining commodities. The increase in mining activity has also affected other industries, particularly those in downstream production process industries such as the manufacturing industry. An analysis by state highlights the significant contribution Western Australia and Queensland make to Australia's total mining private capital expenditure.
The fourth estimate for Total New Capital expenditure in the Mining industry for 2010-2011 is $55,355m. This is 46.6% higher than estimate 4 for 2009-2010. High capital expenditure expectations reflect a belief by the mining industry of continued demand for Australia's resources and suggest that the surge in mining capital expenditure will continue in the medium term.
Battellino R (2010), 'Mining Booms and the Australian Economy', RBA Bulletin, March.
Connolly E and Lewis C (2010), 'Structural Change in the Australian Economy', RBA Bulletin, September.
Reserve Bank of Australia, Statement of Monetary Policy, May 2010
1 In seasonally adjusted, volume terms. <back
2 In current price terms. <back
3 In seasonally adjusted volume terms. <back
4 See RBA Statement of Monetary Policy, Pg 11 - 14 and Lowe, Philip. "The Development of Asia Risk and Returns for Australia." Natstats 2010 Conference, Sydney, 16 September 2010. <back
5 Source: International Trade Price Indexes, Australia, Sep quarter 2010, ABS Cat. no. 6457.0 , Export Price Index by Division: Mining. <back
6 Company Gross Operating Profits in seasonally adjusted, current price terms, Business Indicators, Australia, Jun quarter 2010, ABS cat. no. 5676.0. <back
7 In seasonally adjusted, current price terms. <back
8 In seasonally adjusted, current price terms. <back
9 In original, current price terms. <back
10 See the Explanatory Notes of this publication for definitions of capital expenditure asset types. <back
11 In seasonally adjusted, volume terms. <back
12 In original, current price terms. <back
13 In seasonally adjusted, current price terms. <back
14 In original, current price terms. <back
15 Total factor income is that part of the cost of producing the gross domestic product which consists of gross payments to factors of production (labour and capital). It represents the value added by these factors in the process of production and is equivalent to gross domestic product less taxes plus subsidies on production and imports. <back
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