Can Australia’s mining boom turn into bust?

November 10th, 2007

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In our earlier article, Rising metals price=rising mining profits? Think again!, we questioned the conventional thinking that the rise of China will always result in rising profits for Australia’s mining companies. If you understand the concept of the Austrian Business Cycle Theory (ABCT), you will be able to understand how booms can lead to bust.

Today, we will look at this news report through the perspective of the ABCT: Investment pours in: $28bn of new projects:

THE investment boom has built up a new head of steam, with 130 new projects worth a total of $28 billion announced in the September quarter.

There are now projects worth $178 billion either under construction or with firm commitments, while investments totalling a further $351 billion are in various planning stages, according to the consulting firm Access Economics.

In Rising metals price=rising mining profits? Think again!, we mentioned the implication of the peak of business cycle on mining profits. Now, we will put forth this question to you again: Does Australia has adequate resources to ensure the completion of all these hundred of billions of dollars worth of mining projects/investments (even factoring the fact that more projects are on the way)?

As you mull through the answer of this question, pay attention to these paragraphs in the above-mentioned news report:

Mr Richardson said that despite the build-up in the construction workforce, projects were taking longer to complete and costing more than budgeted, because of the shortage of resources.

In the September quarter, there was $10.8 billion in projects completed, however cost blow-outs and upgrades raised the budget on projects under way by a further $15.3 billion.

“Everything is slower because everyone is tripping over everyone else. Completion times have fallen away,” he said.

If the answer is no, we will one day see the mass liquidation of a lot of these projects as they become unprofitable. On that day, you will see news headlines screaming about the mining ‘downturn.’