If history is anything to go by miners won’t know when the next investment boom will arrive until it smacks them in the face, Deloitte Global Mining Leader Phil Hopwood says.
The mining investment super cycle Australia has just come out of is one of a number in history and Hopwood says it won’t be the last, but predicting the next one will require a good look at the past and a change of tack.
”In 2003-2004 people were looking at global steel demand,” he said.
“People didn’t see the full extent of demand coming from China until it actually hit them.
“People weren’t sitting there in 2002-2001 saying this demand coming out of China is going to be fantastic.
“It kind of hit in 2003-2004 going forward to 2005 and that’s when the full scale became apparent but having said that maybe China is a once in a lifetime opportunity because it’s now moving into a more consumption based economy, rather than a construction based economy.”
Traditionally Australia’s mining sector runs on a cycle of boom and bust but to move into prime position for the next upturn, miners are going to have to be more on the ball, Hopwood said.
“This is an industry which needs to get more sophisticated in how it manages its cost, how it manages its investment cycle and how it allocates its capital projects,” he said.
“The issue with the miners wasn’t that they were building too many mines, the issue was actually how they were managing the costs around those mines.
“It’s not about just ‘sell volume, and when the demand goes, just stop’.
“There’s a need to be more innovative and more responsible for the long term management of all their costs.”
But figuring out what could trigger a repeat mining investment boom, how big it could be, and predicting when it will crash, Hopwood said we probably won’t know until the demand hits the sector in the face.
Looking at the past could help the sector make some predictions, however.
“The iron ore mines in the Pilbara which have been tremendously profitable in the last few years were actually built for the 1960s expansion in Japan,” Hopwood said.
“After the second world war massive investment went into rebuilding Japan which required iron ore, steel and the like and the genesis of investment in the Pilbara came from that Japanese infrastructure development.
“It’s supply and demand – if you don’t build the mines, you don’t build the supply, you won’t be able to feed the demand.
“You’re never that far away from an investment boom because the demand is still there.”
Hopwood says demand is going to be driven by South East Asia, South America, parts of Africa, China and India.
“You still have those huge populations in South East Asia, put together the Philippines, Indonesia, Vietnam, Cambodia and Thailand and you have the best part of 750 billion people,” he said.
“The activity and innovation that is happening in parts of Africa, there’s still a lot of problems there, is quite exciting, don’t forget Africa.
“In terms of size of demand and size of population there’s some big economies in South America.
“When India gets its act together, you’ve still got an economy of 1.1 billion people.
“But the place that I always go back to is South East Asia, Indonesia, and The Philippines. These are sizeable economies and yes there are challenges there in terms of investment but there’s no doubt in terms of the vibrancy around some of those economies.”
Australia’s was in a strong position to take advantage of this demand, Hopwood said.
“If you look at where Australia sits in all of that, a country of 22 million people with some of the best commodities in the world, you’ve got to say Australia has a great opportunity going forward especially in terms of its proximity to some of those big demand centres going forward,” he said.
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