It looks like 2016 will be a turning point for Australia's mining sector

TORSTEN BLACKWOOD / AFP / Getty Images

With just over two months to go, it appears that 2016 could well be an important turning point for Australia’s mining sector.

Commodity prices have recovered, the downturn in capital investment appears to be nearing its end and there are even some signs of a pickup in non-mining infrastructure investment, which is helping to boost sentiment after years of depressing, capital-destroying developments.

For an economy that’s still highly-dependent on the mining sector, it’s been welcome news.

And much of it has been due to China, both through increased infrastructure investment and reforms to the nation’s industrial sector.

Ivan Colhoun, chief economist at the National Australia Bank’s markets division, certainly thinks that the mining cycle downturn could be nearing its end, producing a series of charts to help bolster this view.

Here’s a chart that many of you will be familiar with — the recent surge in iron ore and coal prices, Australia’s most valuable goods exports by dollar value. While prices remain well below past peaks, there’s been a noticeable turnaround in 2016, particularly for coking coal spot prices, which is hard miss.

Fitting with the recovery in Australia’s key commodity export prices, sentiment in the nation’s mining sector has also firmed, as shown in the chart below from the NAB’s monthly business survey.

Colhoun says that recent price gains “seem to be showing up in high frequency indicators of the economy, with the NAB business survey reporting positive business confidence in mining and improved confidence in WA”.

He also believes that recent strength in coal prices “will likely see some further gains in conditions and confidence recorded in mining in the months ahead, though more of this should show up in the Queensland and NSW economies, which dominate coal”.

Mirroring the recovery in mining sector confidence, potentially a lead indicator for improved conditions across the sector, there are also signs of a pickup in hiring in the sector, adding further weight to the belief that things may be about to turn.

This is seen in new job advertisements across Australia’s mining, resources and energy sector, using data supplied by online jobs porthole Seek.

Yes, they’re low — something that should come as no surprise given developments across the sector over the past five years — but there are clear signs that openings are close to bottoming out, if they haven’t already.

Put together, Colhoun suggests that “these trends suggest the bottom of the mining cycle is more clearly upon us, which should increasingly lessen the drag on the economy from this source as we move into 2017”.

He also notes that “a number of non-correlated commodity prices have bottomed at broadly the same time, suggesting the long period of price falls may have finally produced greater supply rationalisation”.

This, he says, bodes well for Australia on several levels.

“If sustained, these prices will likely add to thoughts that global inflation and bond yields may have bottomed and will provide some support for Australian company profits, corporate tax receipts, nominal GDP and state government royalty receipts,” he says.

And he’s not alone.

Paul Bloxham, chief economist for Australia and New Zealand at HSBC, believes recent strength in Australia’s key commodity markets presents some upside risk for nominal GDP growth, tax revenues and Australia’s terms of trade, something that could boost nominal national income and, as a consequence, wage growth and domestic inflation.

To Bloxham, much of the turnaround in commodity prices and mining sector activity comes courtesy of China, and not just because its government has rolled out increased infrastructure investment this year.

“The deeper and more nuanced point is that this is a clear example of Australia benefiting from Chinese reform,” he wrote on Monday, citing specific attempts from Chinese policymakers to reduce overcapacity in the nation’s coal sector.

“Slower growth in Chinese production would typically be thought of as negative for Australia, but in this case it clearly is not.

“Australia is benefiting from this Chinese reform because Australia is the lowest cost producer of high-grade commodities,” he adds.

That certainly fits with recent iron ore export data from Port Hedland which reveals Chinese demand remains as strong as ever.

Though there’s promising signs that Australia’s mining sector has turned a corner, the question now is where to from here?

In the wake of higher commodity prices, will the push by Chinese policymakers to reform sectors plagued by overcapacity continue, or will they encourage more marginal firms to stay in production?

And then there’s the concern about the outlook for China’s residential property market, with recent measures to curb excessive price growth in some major cities creating concern over whether Chinese demand for raw materials will last, particularly as it has helped to underpin construction activity this year.

These are all questions that, as yet, remain unanswered.

When they are, it will almost certainly dictate just how robust, or fleeting, Australia’s next mining sector upswing will be. That, in turn, will determine the net benefit for the broader Australian economy.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.