Local miners are grappling with the most significant quarterly drop in profitability since the upheaval of the global financial crisis, as plummeting prices for thermal coal and natural gas send shockwaves through the resource sector, affecting both corporate earnings and government revenues.
According to data released by the Australian Bureau of Statistics on Monday, profits within the mining sector experienced a sharp 21 per cent contraction during the three months leading up to June. This unexpected decline played a pivotal role in the broader economy, contributing to a more pronounced-than-anticipated 13 per cent slump in overall profits across various sectors.
The repercussions of this profit downturn are expected to reverberate in the national accounts for the June quarter, which are scheduled to be unveiled on Wednesday. Market analysts are projecting a meager 0.3 per cent expansion in GDP for the three-month period, triggering a decline in the annual growth rate from 2.3 per cent to 1.8 per cent.
With economic growth rates slowing and inflation on the decline, market consensus is leaning towards the Reserve Bank of Australia maintaining the cash rate at its current level of 4.1 per cent. The decision is anticipated at the upcoming board meeting on Tuesday, marking the final meeting under the leadership of outgoing Governor Philip Lowe.
The mining sector's plummeting profits can be attributed to diminishing prices of thermal coal and liquified natural gas. The Reserve Bank of Australia's commodity price index has fallen by a staggering 17 per cent since the beginning of the year.
Economist Chris Richardson, a seasoned observer of budgetary trends, remarked that the decline in the sector's profits was not entirely unexpected. He noted that as the terms of trade remained at exceptionally high levels, it was unsurprising to witness a decline in prices and a consequential impact on profits. Richardson explained, "We are earning just pure cream, and so every little bit of prices is one-for-one eating into profits right now."
The ramifications of lower commodity prices extend to governmental budgets, both at the federal and state levels. Governments have experienced significant windfall gains from mining royalties and corporate tax receipts, following a meteoric 90 per cent surge in commodity prices between mid-2020 and mid-2022. Despite incorporating predictions of further commodity price declines, the May budget still outlines the potential for the federal government to slip back into deficit during the current fiscal year.
While commodity prices have indeed decreased, Richardson suggested that the decline isn't substantial enough to definitively rule out the possibility of Treasurer Jim Chalmers announcing a second budget surplus in the upcoming May 2024 budget. Nevertheless, the feasibility of this surplus could be jeopardized if China's economic deceleration intensifies, considering Australia's substantial ties to the second-largest global economy.
Beyond the confines of the mining sector, profits in other industries also contracted by 5 per cent, indicating weakness in manufacturing, transportation, hospitality, and real estate. Wages continued to outpace profits due to a tight job market, with non-mining wages observing a 9.9 per cent increase over the past year, while non-mining profits saw a more modest 5.1 per cent rise.
The latest data release not only accounted for changes in pay rates but also factored in workforce composition and headcount fluctuations, unlike the wage price index. Additionally, inventory levels saw an unexpected decline of 1.9 per cent, in stark contrast to market expectations of a 0.4 per cent gain. This development is predicted to shave approximately 1 percentage point off GDP growth in the June quarter.
Commonwealth Bank economist Stephen Wu regarded the surprise inventory reduction as a "significant risk" to the national accounts. However, JPMorgan economist Tom Kennedy speculated that this decline in inventories could potentially lead to stronger-than-expected household spending or indicate lower-than-forecasted imports, thereby offsetting the negative implications of dwindling inventories on GDP growth.
