Commodity prices have recovered sharply in the past couple of years, supported by a pickup in the global economy, reduced mining sector investment along with moves from policymakers in China to shutter illegal and inefficient commodity production.
Few places in the world know that better than Australia, a nation highly exposed to the swings in commodity prices and its impact on the broader economy.
After a prolonged period of commodity price weakness, Australian terms of trade have risen sharply over the past two years, helping to boost national incomes, mining sector profits and government tax revenues.
Along with higher commodity export volumes, it’s provided a welcome tailwind for the economy in the final throngs of Australia’s mining infrastructure boom.
Well, that economic tailwind may be about to get even stronger if the chart below is a guide.
From the Commonwealth Bank, it shows the evolution in Australian mining sector investment in dollar terms over the past five years, looking specifically at the value of publicly announced projects, those in the feasibility stage, along with those that have been fully committed to begin construction.
After several years of declines, leading to Australia’s so-called mining CAPEX “cliff”, there are tentative signs emerging that suggest the strength in commodity prices is now leading to an increase in investment.
“The rise in commodity prices since the beginning of 2016 has started to turn the tide on the pipeline of Australian resource projects,” says Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank.
“The downward trajectory of publicly announced projects for example, saw its first increase in a number of years in 2017.
“Mineral exploration expenditure also increased 10% in 2016/17 in Australia, further suggesting that interest in new resource projects is rekindling.”
While a promising sign for the economy in the period ahead, Dhar says the true turning point for resource investment will come when new resource projects begin to move from the feasibility to the construction phase.
Based on what he’s seen recently, Dhar says there’ll be some improvement, although he admits it will likely be modest and prolonged in nature.
“While the investment environment is improving, it will be slow and gradual, epitomising the caution that has dominated the commodity price recovery over the last two years.”
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