by Dion Hershan – Head of Australian Equities
We have just returned from a visit to Perth for the first time in two and a half years. There is a clear 2010 style echo: everything you have heard and read about ‘help wanted’ signs, $8 lattes and Uber prices super-surging appears to be true. The implications, though, are far broader. If you can’t get an Uber driver, good luck getting an underground geotechnical engineer!
With the economy booming, the recent commodity price surge (+16% YTD, 39%yoy) yet to actually filter through and state unemployment at a paltry 2.9% the pressure is building. This positive shock YTD is worth ~$94bn to Australia, mostly to WA given it is at the epicentre of the iron ore industry ($186b exports at spot prices*), LNG (Australia is the world’s 3rd largest exporter) and lithium (#1 producer and ramping). You can see why many locals want to secede and reclaim their GST receipts!
The planned capex boom (off a depressed base) seems almost impossible to deliver, and hyper-inflation for construction and production disappointment seems inevitable. However, so too do higher commodity prices given the markets are likely to remain tight. Since WA represents over 60% of Australia’s exploration expenditure (refer Chart 1) and is a clear #1 for construction activity, these are critically important dynamics for the Australian economy.
For Australia’s resources sector to deliver into its potential it clearly needs; (i) a massive influx of skilled migration and appropriate environmental permitting that can be fast-tracked; (ii) companies/executives to take the risk and order long lead time items (there are 2-3 year waitlists for critical equipment) and (iii) a whole lot of luck. The need for Australia to deliver is also critically important to decarbonising globally, with 50% of the projected growth in lithium production up to 2030 expected to come from WA.
Our base case is that the bottlenecks represent a real impediment to volume growth, and high prices for future facing commodities could persist for some time. With that in mind we remain overweight producers Independence (Lithium, Nickel), Oz Minerals and Sandfire (Copper) and BHP (diversified) and underweight the companies with large, speculative/blue sky projects.
