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Country Reports

Atradius analyses Australian Economy with new Country Report

By CreditMan Friday, September 18, 2015

With Australian politics in the headlines, what are the economic challenges facing the newly appointed Prime Minister Malcolm Turnbull? Leading trade credit insurer Atradius has published an analysis of Australia’s economy in a new country report.

The Atradius report assesses Australia’s current economic woes which follow a significant decline in the mining industry driven largely by the commodity boom. A major ‘shake-out’ of the mining industry in Australia is predicted with only the big suppliers expected to survive in the years ahead.

Until 2014, the rapid urbanisation and industrialisation of emerging economies, especially China, prompted a dramatic economic upswing in the Australian mining industry. However, China’s economic slowdown has led to a fall in demand and to a significant drop in commodity prices. Metal prices have dropped by 14% since November 2014, reaching a total decline of 44% since its peak in 2011. Meanwhile, iron ore and copper prices have dropped by 22% and 28% respectively and coal prices are also declining

Jason Curtis, Commercial Director for Atradius UK said: “As a consequence of the downturn in demand and prices, there have been major redundancies, huge write downs on assets and projects have either stalled or been delayed with exploration activities effectively coming to a standstill. At the same time, related sectors such as construction and businesses serving the industry such as small airlines that carry miners, restaurants, hospitality and food servicing companies are also struggling.

“We have seen several mining companies deciding to cease unprofitable operations or going into administration. Companies are cutting their operational expenditures, reducing staff and de-leveraging their balance sheets. During the boom period, mining contractors invested heavily in new equipment, funded by loans that still need to be repaid, irrespective of the level of income being generated. It seems that a large shake-out in this sector is underway and it may only be the big suppliers with world-class assets, high production volumes and low costs who are able to survive.

“Looking forward, commodity prices are expected to remain low while major mining companies do not show any signs of cutting production which will further exasperate the disparity between supply and demand. A recovery in non-mining investment will be needed to deliver long-term and sustained economic growth in the post-mining boom transition phase. For instance, the depreciation of the Australian dollar in the last year has benefited tourism and other export-oriented industries in manufacturing and agriculture. However, the depreciation is still insufficient to achieve balanced growth and a further depreciation seems to be both likely and necessary. Non-mining business investment remains subdued despite historically low interest rates. Many companies perceive business conditions as satisfactory but not sufficiently good enough to lift investment plans. Uncertainty about the future means that businesses are deferring new capital expenditure decisions until they see a sustained improvement in demand.”

The Australia Country Report is part of a suite of free country and economic reports published by Atradius to advise businesses on the risks and opportunities of trading overseas.

Other key statistics in the report include:

  • Business insolvencies are predicted to level off or increase slightly in 2015 with an estimated 3% decrease in 2016.
  • GDP growth has slowed since 2012 due to the onset of decline in both mining and non-mining investment, lower growth in consumer spending and the high Australian dollar. Growth is expected to slow to 2.4% in 2015 and 2.6% in 2016.
  • Unemployment rose from 5.2% in 2012 to 6.1% in 2014, expecting to remain at this level during 2015-16.
  • Mining investment is expected to decrease by more than 20% in 2015, accelerated as mega-LNG projects move towards completion.

The report also provides Atradius’ outlook on Australian’s industries: