--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Nov 28 The reasons why
Australia's resources boom are far from over, and the reasons
why there are concerns about its long-term sustainability, were
both on display in the latest official update.
First, the good news: The Bureau of Resource and Energy
Economics said the investment committed to projects in Australia
rose to a record A$268.4 billion ($281 billion) by the end of
October, up from A$260.8 billion six months earlier.
That figure alone should be enough to dispel any concern
that the commodities boom that has helped Australia post 21
years of consecutive growth and carried the nation through both
the 2008 global recession and the 2001 tech crash is over.
Now for the not-so-good news: The investment is heavily
skewed toward liquefied natural gas plants, which are suffering
massive cost escalations and a threat to profitability as buyers
try to break the nexus between LNG and oil prices, which would
lower LNG prices.
LNG plants represent A$194.9 billion of the total of
committed projects, next up being iron ore at A$26.2 billion,
infrastructure at A$24.6 and coal at a relatively paltry A$14.3
Both iron ore and coal are facing slightly less certain
outlooks, given the easing of growth rates in major buyer China,
which is trying to rotate its economy to be more consumer
demand-driven and less dependent on exports and fixed-asset
While this doesn't affect projects already committed, it
does make it more likely that those ventures still to get final
approval will be delayed or shelved.
The bureau identifies A$291.8 billion of projects at what it
terms the feasibility stage, in which initial studies have been
completed and deemed supportive of further development work.
In other words, these are projects companies would like to
undertake, assuming the economics of market demand, capital
expenditure and financing can be made to stack up.
And here lie the problems lie for the future of the
While LNG, gas and other petroleum projects still command
the lion's share at A$104.5 billion, a substantial second place
is coal at A$75.7 billion, with iron ore and infrastructure
level-pegging at A$44.9 billion and A$44.7 billion respectively.
Since much of the infrastructure spending is on rail and
ports for the export of coal, it's clear this sector is the
potential driver of resource investment once the current boom in
LNG spending is completed.
Coal is problematic as this is probably the area most
vulnerable to project cancellations, scaling back or delays.
This is because China's appetite for coal may not be as
all-consuming as had been hoped, and there are plenty of other
suppliers lining up for a piece of the action.
On the global cost curve, Australian coal projects tend to
lie in the upper half, and even the top quartile, given high
labour costs and the need to build lengthy railways and ports.
This is especially the case for the Galilee coal basin,
where several major projects are planned, including the China
First venture, led by maverick billionaire Clive Palmer's
Waratah Coal, and Adani's Carmichael mine.
While it's too early to say these projects will be shelved,
the risks are rising and coal industry executives and
contractors, speaking off the record, express increasing
scepticism over the ambitious timetables outlined by the
Even the LNG projects may not make it from the feasibility
stage to the committed phase, with the A$24-billion Arrow LNG, a
joint venture between Royal Dutch Shell and PetroChina, believed
to be most at risk.
The bureau's third category is for projects at the publicly
announced stage, meaning companies have said this is what they
plan to do, but have not started serious development work as
These projects may be worth between A$91 and A$133 billion,
according to the Bureau, but at the moment many can be
discounted, at least until they move into the feasibility stage.
And many may not get there, given the sharp escalation in
exploration costs, with the Bureau showing the average cost per
metre drilled at a greenfield site has jumped from A$151 in
2003-04 to A$345 in 2011-12.
What the bureau's report shows is that while Australia's
resource boom is locked in for another few years, beyond that
things get less certain and will largely depend on whether the
outlook for coal improves, coupled with the maintenance of the
more solid prospects for LNG and iron ore.
(Editing by Clarence Fernandez)