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Bulletin

21 February 2013

Australian CAPEX survey: a preview


Risk that non-mining remains subdued, as mining investment begins to lose altitude
A rotation of the growth drivers of the Australian economy is set to emerge over the next one to two years. A peak in mining investment is looming, creating the need for other sectors such as housing construction and non-mining business investment to strengthen. The precise timing of this rebalancing and the smoothness of the transition remains particularly uncertain. We see the risk that business investment by non-mining sectors will continue to be relatively subdued in the near-term and will be slow to respond to a likely strengthening of household demand during 2013 and 2014. This adds to the risks of a growth gap. The ABS survey of business investment plans, the CAPEX survey, will provide some guidance to growth prospects. The December quarter CAPEX survey will be released on 28 February, with responses received over January and February. This update will include the initial estimate of investment plans for the 2013/14 financial year. Here we provide a discussion of the CAPEX survey and key forces shaping investment plans. In addition, on page 3 we provide a few scenarios for Estimate 1 of 2013/14 capex spending, ranging from a smooth rebalancing of growth to the other extreme. September 2012 CAPEX survey - a recap The ABS released the September quarter 2012 edition of the CAPEX survey on 29 November. The survey was conducted over the October, November period. Spending plans for 2012/13 were scaled back significantly, driven by the mining sector. Mining was responding to the squeeze from higher costs and lower global commodity prices. In the lead up to this survey, there were announcements that some key potential projects were to be either delayed or shelved (eg Olympic Dam expansion). Of note, spot iron ore prices slumped from $135 in mid July to a low of $87 early in September. A recovery was underway by the time of the ABS survey, with prices at $104 by end September, rising to $120 by late October, followed by a consolidation. Mining Capex plans for 2012/13 were reduced to $109bn at Estimate 4, down from Est 3 of $119bn. Applying realisation ratios, Est. 4 implies $97bn of investment for the full 2012/13 year, an increase of 18% on 2011/12. This is a downgrade from a 33% increase suggested by Est. 3. Of note, actual mining Capex in the initial quarter of the 2012/13 year was $24.7bn, or about $99bn annualised. Hence, at face value, the survey implies that mining investment is set to decline over the remaining quarters of 2012/13.

Mining CAPEX: estimates & actuals


$bn 120 100 80 60 40 20 0 2005/06
Sources: ABS CAPEX survey, Westpac Economics

$bn
2012/13 3rd est: $119bn 4th est: $109bn implies actual of $97bn

120 100 80 60 40 20 0

Mining CAPEX
Estimates of CAPEX plans for a given year & final outcome

2007/08

2009/10

2011/12

CAPEX plans by industry


% chg, yr avg
Sources: ABS, Westpac Economics

% chg, yr avg
Mining Manufacturing Services Total

80
History in real terms,

80 60 40 20 0
Financial years

60 40 20 0 -20

Expectations in nominal (calculated using avg. realisation ratios)

-20 2013f

2008

2009

2010

2011

2012

Mining CAPEX spending - profile


AUDbn 100 80
annual, yr to Jun (lhs)
Sep 12 qtr, actual $99bn annualised

AUDbn 25 20
quarterly (rhs) potential profile (rhs)
Planned annual 2012/13 $97bn

60 40 20 0 Jun-97

15 10 5

Sources: ABS, Westpac Economics

Jun-01

Jun-05

Jun-09

Jun-13

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

Bulletin
21 February 2013
Mining investment hitting a peak in the September quarter 2012 is earlier than suggested by other information. The pipeline of work on mining projects already under construction points to further upside. Our central case forecast is for total private infrastructure activity to advance over the first half of 2013 and then begin to decline over the second half of the year. December 2012 CAPEX survey The December quarter CAPEX survey will be released on 28 February, with responses submitted over January and February. An initial estimate of spending plans for the 2013/14 financial year will be released in this survey. This will be the first of six estimates, ahead of the actual figure, which will be available late in August 2014. Since the September survey, some positives are evident. An improvement in global economic conditions and sentiment is apparent. Associated with this, commodity prices are off their lows. Notably, iron ore was trading at $145 in mid January.
40

CAPEX spending & Capex outlook (NAB)


50 40 30 20 10 0
Capex 12mth outlook, adv 2qtrs, NAB (lhs)

net bal.
Qtrly
Sources: NAB, ABS, Westpac Economics

% yr

40 30 20 10 0 -10

-10 -20 Dec-89

CAPEX spending, ABS (rhs)


updated: Feb 13

-20 -30 Dec-05 Dec-09 Dec-13

Dec-93

Dec-97

Dec-01

Mining sector: confidence & conditions


net bal. Confidence Conditions
mth 3mth avg

net bal.

Against this, the mining sector's recently refound focus on cost control appears to have been sustained into 2013. NAB business survey - some insights The NAB business survey potentially provides some insights into the upcoming CAPEX survey. The quarterly NAB survey includes a question on capex plans for the next 12 months, a series which tends to lead actual capex spending by about 2 quarters. The December quarter NAB survey is a little dated, having been in the field from November 19 to December 7. Capex plans for the next 12 months were relatively subdued, moderating to a net balance of +10, below the historic average for this series of +21. Such a reading points to downside for actual capex spending near-term. By industry, the December quarter NAB survey reported weak and sharply lower capex plans for mining, ongoing weakness for manufacturing and ongoing soft plans for the services sectors. The more recent January monthly survey, in the field from January 25 to February 4, revealed that overall business confidence and conditions improved modestly. There was a sense of relief apparent in the mining sector, with confidence rebounding. However, the conditions index for the mining sector weakened further - although the reading was most likely distorted by extreme weather conditions in Qld (floods) and WA (cyclones). Low capacity utilisation levels provide an explanation for soft investment across the broader economy. While the Australian economy continues to expand, the pace of growth beyond mining investment has been sub-par. In this environment of soft demand capacity utilisation levels have moderated, following a recovering during the second half of 2009 and during 2010. Utilisation slipped below average levels in mid 2012. This is consistent with a loss of momentum in the economy, reflective of a number of domestic and global factors. The initial read on capacity utilisation in 2013, from the January monthly business survey, was softer again. Compounding the fundamentals of current subdued demand and excess capacity is an air of uncertainty. The international environment has been challenging and the Australian dollar is proving to be stubbornly high. The next Federal Election is approaching (scheduled for 14 September) which is adding to uncertainty. Against this backdrop of weak confidence commercial finance trended lower over recent months.

deviation from avg

80 60 40 20 0 -20

30 20 10 0 -10 -20 -30 -40 -50 -60 Jan-07


Sources: NAB, Westpac Economics

mth 3mth avg

deviation from avg

-40 -60

Jan-11

Jan-07

Jan-11

Capacity utilisation weak


6 4 2 0 12 -2 -4
downturns
Sources: ABS, NAB, Westpac Economics

net balance
Capacity utilisation (lhs)

% of GDP
Investment, % of GDP * (rhs)

16 15 14 13

* Non-mining investment, nominal

11 10 9 Jun-92 Jun-97 Jun-02 Jun-07 Jun-12

-6 Jun-87

Commercial finance & business confidence


30 20 10 0 -10 -20 -30 Dec-00
Business confidence* (lhs) Commercial finance* (rhs)
* Smoothed (2mth / 3mth avg)

index

% ann
Sources: ABS, NAB, Westpac Economics

60 40 20 0 -20 -40 -60

Dec-03

Dec-06

Dec-09

Dec-12

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

Bulletin
21 February 2013
Mining: CAPEX spend & Capex outlook (NAB)
Scenarios Here we consider a few scenarios for Estimate 1 of 2013/14. At the outset here are a couple of key caveats. (1) The 2012/13 starting point is unknown. Any surprises for 2012/13 will impact our interpretation of 2013/14 plans. We suspect that plans for 2012/13 will be broadly as reported three months ago. However, we do see upside risks to 2012/13 intentions. As noted previously, Est. 4 of mining intentions are weaker than suggested by the existing pipeline of construction work. Est. 4 for 2012/13 implied growth of 7% on 2011/12. For Est. 5 to imply 7% growth and a final outcome of $169bn would require a print of $179bn (upgraded from $173.4bn). (2) The industry mix of investment plans is of significance. The calculation is affected by the mix because average realisation ratios differ by industry and we calculate the total from the sum of the three industry figures. Moreover, our interpretation of the survey will reflect a consideration of both mining and non-mining investment prospects. Also note, prior Estimates are subject to revision. To repeat: the following scenarios are based on an expectation that Est 5 for 2012/13 will be $179bn, implying a final outcome for 2012/13 of about $166bn. (To the extent that there is any upside surprise to Est 5 for 2012/13 then Est 1 for 2013/14 will need to be higher in each of the following scenarios.) Scenario 1, 2013/14: - a smooth rebalancing of growth Est 1 of $150bn. Implies an outcome of $170bn, growth of +2.5% Mining: flat Manufacturing & services: growth of 6% Note: the CAPEX survey substantially under estimates investment by the services sector. A healthy rise in services investment would provide a more substantial boost to business investment as measured in the national accounts. Also note, these figures are in nominal terms. Inflation for capex spending is negligible at present, running at only 1% annual for mining and just 0.6% annual for the aggregate. Scenario 2, 2013/14: - a resilient result Est 1 of $147bn. Implies an outcome of $166bn, and a flat outcome Mining: a decline of 2% Manufacturing & services: growth of 3% The RBA would arguably be encouraged by such a reading. This could be interpreted as a modest pace of decline in mining investment and tentative evidence of a pending modest improvement in investment across the broader economy. Scenario 3, 2013/14: - no rebalancing of growth Est 1 of $143bn. Implies an outcome of $162bn, and a decline of 2% Mining: a decline of 4% Manufacturing & services: flat Such an outcome and such a mix would add to concerns of a potential growth gap. This would confirm that mining investment
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

100 80 60 40 20 0 -20 -40

net bal.
Capex 12mth outlook, adv 2qtrs, NAB (lhs) CAPEX spending, ABS** (rhs)

% yr
** smoothed

100 80 60 40 20 0 -20 -40

-60 Dec-89

qtrly survey

Sources: NAB, ABS, Westpac Economics

updated: Feb 13

-60

Dec-93

Dec-97

Dec-01

Dec-05

Dec-09

Dec-13

Manufacturing: CAPEX spend & outlook (NAB)


50 40 30 20 10 0 -10 -20 -30 -40 Dec-89
Capex 12mth outlook, adv 2qtrs, NAB (lhs) CAPEX spending, ABS** (rhs)
** smoothed

net bal.
qtrly survey
updated: Feb 13

% yr
Sources: NAB, ABS, Westpac Economics

40 30 20 10 0 -10 -20 -30 -40 -50

Dec-93

Dec-97

Dec-01

Dec-05

Dec-09

Dec-13

Services: CAPEX spend & outlook (NAB)


60 50 40 30 20 10 0 -10 -20 Dec-89
Capex 12mth outlook, adv 2qtrs, NAB (lhs) CAPEX spending, ABS** (rhs)
** smoothed

net bal.
qtrly survey
updated: Feb 13

% yr
Sources: NAB, ABS, Westpac Economics

40 30 20 10 0 -10 -20 -30 -40

Dec-93

Dec-97

Dec-01

Dec-05

Dec-09

Dec-13

is no longer adding to growth but was instead subtracting. Additionally, there would be no evidence that the nonmining sectors are about to fill the gap. Scenario 4, 2013/14: - a particularly weak result Est 1 of $140bn. Implies an outcome of $158bn, and a decline of 5% Mining: a decline of 6% Manufacturing & services: falls of 3% Investment declining on a broad based front would be cause for concern. With fiscal policy contracting and the currency stubbornly high, monetary policy would have more work to do. Andrew Hanlan Senior Economist, ph (61-2) 8254 9337

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