The National Australia Bank has warned that there are distinct signs the Australian resources boom is turning down.
In a report issued late last week, the bank said the recent trends of strong growth, improved trading conditions and higher profitability in the mining sector appear to have stabilised.
It said data from its Quarterly Business Survey has revealed prices had become limited on the upside and cost pressures were rising, primarily reflecting rising cost of labour and capital equipment.
The bank said it was issuing the report in response to calls for information from its quarterly business surveys.
The bank said the survey results showed that constraints in acquiring labour were limiting output growth and leading to increased cost pressures for local mining firms.
"Around 80 per cent of mining respondents to NAB's Quarterly Business Survey consider the labour market to be a constraint on profitability and output, with this level increasing dramatically since 2003.
"Labour market conditions are expected to remain a challenge in the next 12 months, with a shortage of skilled labour perceived to be the leading constraint on lifting profitability."
A peak in commodity returns – together with rising costs – is likely to see profits ease further.
Against that, however, the bank said respondents had indicated that mining output growth and new investment looks set to remain strong (if a little lower than recent peaks).
"Although the best times of the current boom may be over, the overall industry trends remain positive. The mining industry will remain one of the best performing sectors in the Australian economy."
The bank said that Australian miners have enjoyed spectacular growth in demand and commodity prices over the past four years but the constraints to growing output further, and rising cost pressures "are beginning to impact on trading conditions".
Despite this, the bank says Australia's miners continue to expect strong conditions over the next 12 months: mining is set to remain one of the best performing sectors in the Australian economy.
"While the outlook for profits is comparatively strong – in a historical context – Australian miners expect profit growth to moderate somewhat over the next year.
"Employment in the mining sector remains strong, as Australian mining firms expand production in response to surging demand for resource commodities. However, employment growth has fallen short of expectations for both the near term and 12 months forward
"Since late 2003, there has been a steep increase in the number of mining respondents citing difficulties in securing labour. Around 80 per cent of surveyed producers identify labour as an output constraint – either significant or minor.
"The turn-around in mining conditions over the past five years has been spectacular. China's economic growth has underpinned global demand for resources – eroding spare mining and processing capacity around the globe. This has seen a steep reduction in our respondents citing demand as constraint over the next 12 months.
"In contrast, Australian miners continue to anticipate labour market constraints on profits in the coming year – with around 40 per cent of respondents in the past 12 months describing labour availability as the main constraint on profitability.
"Prices received by Australian miners have begun to stabilise in recent quarters – albeit price data from our survey likely understates actual outcomes. That said, the bulk of respondents reported little or no change to received prices in the June quarter.
"In contrast, the rate of growth in labour costs and purchases were reportedly well above prices received. Wage costs are rising as miners compete for scarce labour, yet few miners have been concerned by wage pressures impacting profitability. At present, Australia's miners are more concerned about the availability than the cost of employees.
"In line with the moderation in mining profitability, miners reported no change in sales margins in the June quarter survey – well below recent outcomes and expectations.
"With employment running below expectations – limiting output growth – and cost pressures mounting, the expectation of a rising in profit margins in the September quarter may be too optimistic.
"While revised lower over recent quarters, output expectations remain very strong – albeit constrained by the availability of labour and capital.
"Investment plans are also off somewhat – but still consistent with a further strong rise and addition to capacity."
Now all this isn't gloomy news, but you have to consider it in connection with the surge in activity in China in recent months and the problems in financial markets and the US economy.
Also focus on the way that the nickel price surged to stratospheric levels, and has now crashed by more than 50% in just three months from the peak back in April-May.
There were plenty of people around willing to argue that the correction in May /June was temporary, just as there are gloomsters warning that nickel has further to go.
It could very well lose more value. But the point is that the resources boom is mature and much ofgreat output and price impetus has gone.
Managing it from now on will be all about cost control, rather than growth for growth's sake.
The BHP-Billiton 2007 result and commentary on the outlook next week should be required reading for anyone interested in the longevity of the boom in resources and growth in the Australian economy.
