On the back of resurgent commodity values, Western Australia (WA) has experienced significant foundational shifts across a range of industries as big mining players react to market movements. With iron ore futures balancing on the shaky precipice of global demand, Western Australia’s resource sector is undeniably heading into its next season of volatility. The question now is, how will the market react, and in turn adapt, to this foundational shift?
Commodity driven market
Western Australia is a commodity driven market. When iron ore / oil and other resources are reporting strong values – we see mines ramp up production and yield substantial profits. Over the past five years, iron ore peaked at US$154 per tonne in December 2013, and bottomed out at US$41 per tonne in December 2015. During this period a huge quantity of assets entered the market as mines ceased operation, causing supply prices to fall drastically as demand was unable to provide balance. Perth CBD’s office vacancies have also seen a huge change, recently hitting a 20 year high, increasing from 16.6% to 19.2% in the six months to January 2017 after sitting at almost 0% in 2009. This is a true indicator that demand is being outweighed by supply in WA’s CBD office lease market. In 2016, iron ore staged a remarkable price recovery to US$92 per tonne, which has seen second-hand equipment strengthen in value and original equipment manufacturers (OEMs) ramp up production. While present mine production levels are sustainable, the question is, and will iron ore’s price be sustained as current levels of supply flood the global market? Not many predicted iron ore to the surge beyond US$80 in 2016/17; if iron ore’s price falls below US$65 per tonne by 2018 (which many are predicting), WA’s second tier miners will come under extreme pressure and struggle to remain profitable, in turn decreasing asset values.
In line with resurgent commodity prices, over the past 12 months there has been short supply of second hand mining assets in WA’s market. Most miners are choosing to repair their equipment to extend its operational life, resulting in second hand prices recovering slightly and an increase in the production of new models. Large mining gear with more than 10 years in operation is typically sold offshore to countries where safety standards and operating precautions are less stringent than in Australia; however, this asset category has dried up recently as Australian miners choose to repair old assets to keep operational costs down.
Strong assets in WA seem tied to the agriculture sector, which marks the state’s next ‘mining boom’. With a few years of good rainfall and strong harvests, coupled with the average price of livestock doubling since 2014, farmers are increasingly investing in assets discarded during the mining downturn, including light commercial vehicles, small construction assets, workshop equipment and water carts.
Prime mover trucks were hit especially hard following the mining downturn. As mines closed, transport companies contracting to mines were put out of business, resulting in an oversupply of late model low kilometre trucks. Prime movers with more than 10 years in operation, high kilometres and no engine rebuild are almost impossible to sell at auction.
WA has seen a mining boom we may never see again. With iron ore driving our state’s markets, it’s satisfying to see it strengthen beyond expectations after years of being obsolete. Equipment prices are recovering and manufacturers are reactivating production facilities to meet the demand, which can be expected to continue as WA solidifies its name as ‘The Iron Ore State’.