SYDNEY--Falling commodity prices have opened up a US$20 billion
hole in Australia's export revenues, intensifying gloom in the
mining sector as companies scramble to restructure debt and rethink
billions of dollars of new investments.
Australia's government Tuesday scrapped expectations that it
will post another year of record earnings from exporting
commodities such as coal and iron ore because of softening prices
and warned that up to 230 billion Australian dollars (US$241
billion) of new investments are at risk unless the industry can
bring costs down and improve productivity.
In a sign of the strain on the resources sector, Fortescue
Metals Group (FMG.AU)--the world's fourth-largest iron ore producer
by volume--said it has secured US$4.5 billion in debt to refinance
loans and stave off a potential fire sale of assets after being
caught out by the sudden fall in the iron ore price this month.
Australia has relied on the mining industry to shield it from
the economic headwind buffeting Europe and the U.S., where high
unemployment and fears over sovereign debt continue to smother
their recovery. China's spending boom on infrastructure following
the financial crisis in 2009 fueled sharp growth in Australian
resources companies' profits, underpinned high commodity prices and
spurred investment in projects down under ranging from gas-export
terminals to vast new iron-ore pits.
But pressure on mining companies is growing as Asia's economic
outlook dims. Economic growth in China--Australia's biggest trading
partner and a key buyer of its energy and raw materials--has
slipped to the slowest rate since 2009 and exports from
labor-intensive manufacturing hubs Zhejiang and Jiangsu provinces
are falling.
That has driven down prices of industrial commodities such as
thermal coal, used to generate electricity, to levels of half their
peak in mid-2008 while iron ore hit a three-year low earlier this
month. Iron ore and coal are Australia's two biggest exports,
respectively.
New Hope Corp. (NHC.AU), one of Australia's largest coal miners,
said Tuesday that it could delay plans to expand a coal mine and
build new ones in Queensland state by up to a year and hasn't ruled
out job cuts as margins come under pressure from the high
Australian dollar, new taxes and weak prices. It followed recent
moves by heavyweight peers including Xstrata PLC (XTA.LN) and BHP
Billiton Ltd. (BHP) to cut costs, including by laying off
workers.
"Although this is not good news, it is by no means a death knell
for the Australian resources industry," Australia's resources
minister Martin Ferguson told a conference in Canberra.
The Bureau of Resources and Energy Economics, a key government
forecaster, said Tuesday that it expects export earnings from
minerals and energy for this financial year ending June 30, 2013 to
fall 2% to A$189 billion because of tumbling commodity prices. The
latest estimate represents a 10% decline from its initial A$209
billion forecast issued just three months earlier.
The stakes are high as Australia's minority center-left Labor
government is depending on mining taxes and royalties to return the
national budget to a slim surplus by mid-2013 ahead of general
elections due later that year. In May, it announced a A$33 billion
public spending savings package, its biggest in decades, in a bid
to achieve its increasingly fragile budget surplus target.
Mr. Ferguson said even though the current cycle of high
commodity prices is over, the resources sector in Australia will
continue to prosper, as more than A$270 billion of investment has
already been locked in--mostly for the construction of terminals to
supply Asia with liquefied natural gas.
But a question now is whether Australia can capitalize on the
next wave of demand growth for iron ore used to make the steel in
Asia's high-rise buildings and coal, and the government is working
with the resources industry to upgrade infrastructure, expand the
pool of skilled workers and improve productivity, Mr. Ferguson
said.
"If we do not make progress on these fronts, Australia will not
grab that second investment pipeline of up to an additional A$230
billion," Mr. Ferguson said.
Many investors are betting that China will lead a recovery in
commodities markets by taking action to stimulate its economy. In
recent days, Beijing approved dozens of infrastructure projects
such as subways and highways, which Nomura estimated would add up
to one trillion yuan (US$157.6 billion) of investment over four
years. That news contributed to a mild rebound in prices of iron
ore and Australian mining companies' stock.
China's economic slowdown is showing signs of reaching a bottom
and the economy could pick up pace before the end of the year, said
David Peever, head of Rio Tinto PLC's (RIO) Australian unit.
"The government [is] letting the handbrakes off. This is a good
sign...and we should start to see a rebound in demand," Mr. Peever
said.
--David Winning in Sydney contributed to this article.
Write to Ross Kelly at ross.kelly@wsj.com, Rhiannon Hoyle at
rhiannon.hoyle@wsj.com and Robb M. Stewart at
robb.stewart@wsj.com
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