Despite growing fears of an economic slowdown and a longer than expected period of lower iron ore prices, the market capitalisation of WA listed companies which comprise the Deloitte WA Index increased 0.2% during August to AUD 140.0 billion.
Iron ore prices continued to fall during the month, decreasing 22.8% to USD 90.30 per metric tonne, due largely to concerns surrounding an economic slowdown in China. The decrease in the iron ore prices has resulted in the cancellation or postponement of a number of large capital projects across the resources sector, resulting in speculation as to the state of the “mining boom”.
Deloitte’s National Mining Leader, Mr Tim Richards noted “the continued uncertainty over the long term growth of China and significant reduction in iron ore prices over the past 12 months has resulted in the shelving of large scale capital expansions and the slowing of planned expansion programs. There is a new sense of caution that is likely to remain for the rest of the calendar year."
However, economic data released during August suggests that although firms have downgraded their capital spending plans for 2012/13, spending could still be up to 90% higher than it was five years ago. Reduced capital spending frees up large amounts of resources (including financial and skilled labour) which may be better applied in cost reduction and efficiency improving processes. Further, what the market should see is supply and demand pressures returning to a more balanced level, and iron ore stabilising at more long-term sustainable prices.
Mr Richards said that “Whilst this will hurt the bottom line significantly, this will force Australian miners and businesses to improve productivity.”
With the exception of iron ore, the majority of surveyed commodities experienced strong price growth during August, with precious metals leading the way. Silver was up 13.5%, gold 4.8%, whilst platinum, tin and oil all experienced near double-digit growth on the back of supply-side concerns.
In terms of the global markets, the US S&P 500 was up 1.1% during August with further quantitative easing likely. Focus will increasingly be on the Presidential Race and its potential impact on the market. The Nikkei was up 3.3%, although industrial production indicators were below analysts’ expectations.
The FTSE 100 grew 1.3%, however sentiment remains weak and uncertainty continues in the Eurozone. The likelihood of a Greek exit is mounting as it continues to struggle to meet its debt and cost reduction obligations. Spain’s largest domestic region, Catalonia, requested more than AU$6bn in emergency funding from the national government, on top of the AU$122bn that Spain has already borrowed from the Eurozone bailout fund to assist its banking system, therefore driving fears that a full sovereign bailout maybe required.
Allaying speculation that the Western Australian “mining boom” is over, many stocks performed well during the month of August. The movers and shakers for the month were Sirius Resources NL, Integra Mining Ltd and Base Resources Ltd, who increased their market capitalisation by 207.1%, 49.2% and 40.7% respectively.
Source - Deloitte
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