Deferrals cloud mining services outlook
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Christine St Anne is Morningstar's online editor.
Fortescue Metals (FMG) this week announced it would shelve some of its development projects in Western Australia, lowering capital expenditure guidance from US$6.2 billion to US$4.6 billion as a result of the decision.
The iron ore miner's decision follows recent steep falls in iron ore prices and a slowing Chinese economy.
Only last month, BHP Billiton (BHP) revealed plans to defer its $30-billion expansion of its Olympic Dam project in South Australia and to defer a $20-billion expansion project in Port Hedland, Western Australia.
Woodside Petroleum (WPL) also signaled it may not proceed with $5 billion of expenditure on the Pluto gas project.
While much of the focus has been on the big miners, the outlook for those companies operating services in the mining sector - one the once fastest-growing sectors in the economy - is now a little cloudy.
While there are a number of projects that are not linked to iron ore - there are still $170 billion worth of liquefied natural gas (LNG) projects in the pipeline - many mining services companies remain exposed to the iron ore projects in Western Australia.
With projects shelved due to high capital costs and falling iron ore prices, it is inevitable that some impact will be felt by those companies servicing the mining sector.
Captive to mining
"Mining is a highly cyclical business. Mining services companies are effectively captive to the mining companies, as they need these companies to provide them with contracts," Morningstar senior industrials analyst Ross Macmillan says.
According to Macmillan, capital expenditure in resources will fall from $6.4 billion to $4.6 billion over the next year.
Mining services companies will face an increasingly competitive environment as they compete for fewer tenders in the resources sector.
"If you have iron ore prices coming off, you are likely to see less iron ore projects as companies pull back on capital spending and production," Macmillan says.
"For mining services companies, this will create a situation where there will be intense competition for fewer contracts. This will have a negative hit on the cash flows and earnings of these companies," he says.