Zenith Finance Blog

RBA Finance

Resources Boom – Bust

What is there to learn from the resources sector, now moving from boom to smaller boom?

The much vaunted announcement by the government of a yawning gap in the national financial accounts would come as no surprise to many sectors of business which have been doing it tough for some time. The resources boom which has been going (more or less) since 2003 looks like it has peaked and its retreat from peak levels is causing not just Federal challenges, but is having direct impact on many sectors.

Already a number of mining towns are reporting closure of retail shops in the townships and tight vacancy rates are now a distant memory for many of the towns. Events include:

  • Xstrata announced plans to cut 600 jobs from its Australian thermal coal operations and said that the investment decision on its proposed $6 billion Wandoan coal project in Queensland was contingent on market conditions
  • BHP announced the closure of its Gregory open-cut coking coal mine in Queensland with the loss of about 300 jobs. Like iron ore, coal prices have been tumbling since about last September as China’s economy has progressively slowed and its steel industry has come under intensifying pressure. 

Meanwhile at the other end of the spectrum in terms of scale, Bowditch & Partners Earthmoving has fallen into receivership, a victim of a slowdown in the coal mining sector. Bowditch operates a mining equipment, machine hire and earthmoving service from the heartland of the New South Wales coal mining industry in Muswellbrook.

It had a “diverse fleet” of earthmoving and mining equipment; a purpose-built and dedicated facility and workshop; current ongoing contracts with a blue-chip customer base; and access to a qualified and experienced workforce.

The business’ demise was the result of the “cyclical” coal sector. What is there to be learned from these events?

  • The economic cycle does turn and growth projections as well as cash flow projections need to be moderated
  • Business failure occurs when decision makers fail on the risk management front by leaving the business over exposed (too few customers; single product/single commodity risk)
  • Planning and reporting is inadequate to pick up the kind of events noted above

Being exposed to a highly leveraged sector such as the resources sector requires acute risk management, timely reporting and locked-down lines of credit. Doesn’t that sound like any business sector today?