Is the mining boom really over and are we about to be plunged into a bust with widespread retrenchments likely?

The simple answer to this is NO, but we are certainly seeing a levelling off in the rapid growth of recent years. And with mineral prices coming down off their stratospheric highs, we are going to see a return of management focus on controlling costs of production. Spiralling costs have been ignored in the rush to increase production as quickly as possible.

The BHP Billiton annual results released on 22 August have crystallised an emerging view that the boom has peaked. As part of announcing lower but still spectacular profits (of US$15.4 billion, still the second highest ever recorded by an Australian business) the company announced it was putting on hold its massive Olympic Dam copper/uranium expansion, the Port Hedland iron ore outer harbour, and the Peak Downs coal mine expansion.

The trend to withdraw from big ticket developments started a few months ago, when Rio Tinto withdrew from a proposed massive expansion of the Abbot Point coal terminal. Since then there has been a steady trickle of similar announcements, while deal-makers like Nathan Tinkler have suddenly found the going much harder in finding finance for new projects and takeovers.

But all the postponed or cancelled projects were never firmly committed projects – and the list of firm committed projects remains very large. The Bureau of Resource and Energy Economics (BREE – known formerly as ABARE) issues a list of major mineral and energy projects every six months, with projects separated into “advanced” which are definitely going ahead, and “less advanced”,  that are only possibilities.

The BREE advanced listing in May 2012 had 98 projects worth a combined $260 billion. That was a 12% increase from October 2011 and a 34% increase from May 2011. All of that expenditure is not occurring this year – “only” some $80-90 billion is (which is more than all investment in all other industries put together). So there is plenty of confirmed investment in the pipeline.

Some major construction contractors have actually welcomed the cooling down of the investment splurge – it means that major project construction can proceed at a more orderly pace.

The CFMEU has always taken the view that not all the major projects could proceed – some were clearly going to knock out others. The series of coal mega-projects in the Surat and Galilee basins in Queensland being an obvious example.

Employment in mining, including in coal mining, has continued to spiral upwards. It has been happening so fast that the statisticians can’t keep up. Some think there are over 60,000 people already employed in coal mining, while others think it’s closer to 50,000.

And with so many new mines and expansions coming into production in the next few years, output is definitely going to increase even if prices are more subdued.

That said, the reduced profit margins and the cooling off in investment fever is going to result in a renewed focus on production costs and productivity. The cost of all mining inputs has ratcheted up strongly and will need to be brought under control. And while wages growth in coal mining has not been huge, the high Australian dollar (and its recent refusal to fall in line with falling mineral prices) and the rapid increase in the number of jobs has meant that labour costs are relatively higher in US-dollar terms.

Rapid growth has resulted in falling output per person as companies sought to expand quickly rather than efficiently. With reduced profit margins, there will be more efforts to control all costs including labour. Companies will be scrutinising their use of contractors and their overall manning/staffing levels. The Queensland Resources Council has warned there will be jobs lost, and there certainly will be.

This is nothing new to the mining industry or any other industry, though it is undoubtedly painful for those at the pointy end of retrenchments.

But we are a long way off from heading into a bust. In the late 1990s the mining industry, including coal, shredded more than one-third of all jobs. Barring a GFC Mark II that’s not going to happen – a lot of investment is still occurring and production will increase. We are moving from an unsustainable boom to more measured growth. Overall, that’s a good thing.

By Peter Colley, National Research Director