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Property Investment and the Mining Boom

Thursday, October 04, 2012

Decrying the end to the mining boom hysteria: Simon Pressley

By Simon Pressley
Friday, 03 August 2012

Widespread media reporting earlier this week suggested that Australia’s mining boom was near its end. Radio broadcasts, tabloids, even Channel 10’s The Project – they all lead with headlines claiming that our mining boom would end in two years.

Had the reporting stemmed from an article written by some random journo I would have given it the usual through-to-the-keeper treatment. To hear that credible economics advisory firm, Deloitte Access Economics, was the apparent source of these statements almost made me choke on my morning coffee. The copious amount of reports and articles that I’ve read over the last few years must be written in a language that I don’t understand.

I’ve been on record describing this not as a “mining boom” but a “resources revolution”. Suddenly, I’m hearing that the large volumes of natural resources which are responsible for powering up so many electricity sockets around the world, not to mention Australia’s own economy, is about to come to a grinding halt. Is someone going to turn the lights off?

From dirt to dollars

A number of the locations which we’ve been buying investment properties in over the last couple of years have benefitted from the economic stimulus from the mining sector. That said, they have all been strategically selected locations with a stable population base, a diverse mix of industries that contribute to the local economy, an abundance of employment opportunities, and demand for accommodation which is not matched by comparable supply.

Suggestions that the mining boom will end in 2014-2015 is misleading. But hey, it makes a good headline so the media will always milk that for what they can.

What is true is that the timeline for completing construction of much of the $240 billion in fully approved major projects is around 2014-2015. What is also true is that there are a number of factors which are deterring large resource companies (especially foreign companies) from investing in additional major projects. I also think policymakers need to be more proactive in developing other buoyant industries.

What has been overlooked by the doomsayers however is what happens when construction of these projects is finished – they are built for a purpose not for practice!

It’s not until key infrastructure such as processing plants, ports, pipelines and railways are constructed that those valuable resources below the dirt can be converted to dollars. That’s when commodities such as coal, gas and iron-ore are processed and exported to the likes of China, India, Japan, South Korea and France. That’s when our governments start to receive billions of dollars in extra revenue each year in the form of royalties. That’s when some of Australia’s biggest companies expect to return bigger profits, which will affect retail superannuation holdings. That’s when consumers will start seeing some of the fortunes promised by Treasurer Wayne Swan – tax cuts, increased superannuation contributions and infrastructure projects. Supply contracts which underwrite these royalties are on terms of up to 20 years.

Suddenly, now that (alleged) end to the mining boom has quite a wag in its tail. Mining doesn’t stop when construction finishes – it starts! The proponents need to get a return on their investment.

To suggest that the mining boom is near an end is admission of shortsightedness. Disregard the doomsayers for a minute and think about this logically. In Australia and around the world, are we likely to continue to breed, thereby resulting in continued population growth? In Australia and around the world, are we likely to continue to manufacture, produce, process and construct? If the answer to both these questions is “yes” then in Australia and around the world we will need more fuel for electricity and steel. If the answer is “no” then we all better stock up on candles.

Australia has some of the biggest reserves in the world of thermal coal and gas (both used in power generation) and iron-ore and coking coal (both used to produce steel). With the world’s pledge to reduce pollution the demand for gas-powered electricity will continue to skyrocket.

A majority of Australia’s natural resources are contained in Western Australia and Queensland. Consequently, the economic fundamentals of these states are the best in the country. And, many of the best property investment opportunities are also in these states.

It’s called the Asian “century” for a reason

Over this last decade the world has become acutely aware of the abundance of natural resources contained within Australian soils. Over the same decade most of Asia (home to 60% of the world’s population) has entered an era of mass urbanisation; an era which is expected to last so long that it is referred to it as “The Asian century” by people, including our very own Prime Minister.

Asia’s demand for natural resources is propelled by its enormous population, its ambition to transverse from an undeveloped to a developed region, and considerable financial capacity to support this.

Forecasts are for Asia’s middle class to explode from approximately 0.5 billion people to 1.7 billion over the next decade. Australia’s total population is only 22 million.

These changes in Asia are structural, they are real, and they will be long lasting. These changes have already altered the landscape for Australian property markets. To explain these changes we have produced a short educational video.

To suggest that the mining boom is near an end is an omission of the important role which Australia will play in “the Asian century”.

There will always be demand for Australia’s resources. In addition to the $240 billion in approved projects there is a similar value in proposed projects. Future project volumes will ebb and flow depending upon the economic and political climate at the time.

The biggest challenges stopping Australia from realising greater potential from additional resource projects include heavy taxes imposed on the mining industry and the lack of confidence/certainty that foreign investors have in our government. The inability of governments to contribute their own funding to some of the infrastructure required (ports, roads, rail lines), the cost and availability of skilled labour, and lost productivity due to industrial relations unrest are also inhibitors.

The opportunities to Australia from “the Asian century” extend well beyond the mining sector. As featured in our video, there are opportunities for agriculture, education, health and tourism.

Glass half full

As a nation, we need to stop moaning and start embracing the opportunities. It’s been four years since the onset of the GFC. Australia’s economy has been strong throughout, yet we persist with paranoia about Europe. Asia continues to boom, yet we continue to worry how long it will last. And the opportunities for our mining sector are enormous, yet we’re trying to predict how long it will last.

Those of us who naturally have aspirations for success look at problems and see solutions. Those of us who are naturally positive people don’t sit idle because of perceived risks; we look to mitigate and maximise opportunities. And those of us looking for confirmation don’t look towards governments or the media; we look at industry leaders and achievers.

For reassurance we should listen to people like Reserve Bank Governor Glenn Stevens who recently said: “Most Australians I encounter who return from overseas remark how good it is to be living and working here. We are indeed ‘lucky’ in so many ways, relative economic stability being only one of them.”

For direction we should follow the doers not the doubters. People like James Packer (entertainment and tourism), Gerry Harvey (retail) and Andrew Forrest (mining).

Leadership from government and business is integral to Australia cashing in on the Asian century. Regrettably, we shouldn’t hold our breath while waiting for this to occur.

Some friendly advice for those of us who are serious about goals and aspirations – focus on the opportunities, tell those around you to stop arguing about how to fix the problems, and remind the doomsayers to stock up on those candles before the lights go out.

Simon Pressley

Comments
Informations commented on 09-Oct-2012 09:36 PM
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