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Western Australian miners return to supply growth as business confidence rises

Western Australian miners have driven the state's business confidence to its highest single-quarter increase since the end of the global financial crisis, and analysts say their determination to boost production is a welcome respite for investors frustrated at years of disappointment despite back-to-back years of rising profits.

The Chamber of Commerce and Industry Western Australia's December quarter Survey of Business Confidence launched this week revealed that the state's miners were the sector expecting the greatest proportion of capital spend increases next quarter.

More than half, at 53%, of the state's miners identified that they expect their capital spend to rise next quarter, nearly double that of the next highest sector, which was manufacturing at 28%.

This follows analysis by S&P Global Market Intelligence of the state regulator's publicly released data revealing applications for new programs had risen 45% year on year and applications for new exploration licenses rose 92%.

CCIWA's survey revealed that overall, short-term confidence (three months) is at its highest level in more than four years and medium-term confidence (12 months) is well above its 10-year average.

Importantly, more than 70% of respondents from the mining sector indicated that they expect production to rise over the coming quarter.

Commonwealth Bank of Australia mining and commodities analyst Vivek Dhar said that as far as investors are concerned, it's about time miners' margins were put toward new supply.

"For us, production has been the part of the economy, not just Australia but worldwide, which has broadly disappointed because a lot of people still remember what happened in 2011-2012 when prices started falling, and they just know that they don’t want to get burned," Dhar said in an interview with S&P Global Market Intelligence.

He said that instead of putting the accumulated margins into new supply, they had gone three ways: back to shareholders; cost-cutting reductions including further improvements to productivity; and debt reduction.

The survey revealed that 31% of miners expect to boost profit margins and more than half, at 54%, anticipate unchanged profits over the next quarter.

Expectations around employment and profitability are emerging as key drivers for development this quarter, which Dhar said was also a good omen for production growth, as it means companies are looking at more projects coming online, even if investors are averse to new project investments.

"That's something the market needs. Supply has disappointed and it needs to respond," Dhar said.

While that has not been so much the case with coal and iron ore, it has been for nickel and copper.

"Bulks have been going through a very different cycle — iron ore and thermal and coking coal — which is more linked to Chinese production of those commodities and restocking demand," Dhar said.

"With iron ore, we know production increases are coming from Rio Tinto and BHP Billiton Group, but they're incremental growth. There's nothing that's going to be a new investment per se. The main constraint when we talk about BHP, Rio and Fortescue Metals Group Ltd. is rail and port."

The US$338 million Silvergrass iron ore mine Rio Tinto opened in August 2017 was to replace existing production, and Dhar said its internal rates of return were "exceptionally high."

Accordingly, the survey showed capital investment planning was also showing signs of growth, which the CCIWA said was crucial for returning to positive growth in business investment following the end of the mining investment boom.

Confidence ripples right through supply chain

CCIWA chief economist Rick Newnham said the recovery in commodity prices had boosted miners' confidence, which leads to further investment.

As iron ore is the state's largest export, a sustained increase in that commodity's price would "inevitably" lead to higher confidence and further investment in export capacity, he said in an interview with S&P Global Market Intelligence.

"This confidence also flows through the Western Australian supply chain — as mining investment increases, optimism is reflected in a range of supply services, from engineering design to increased retail trade from higher wages," he said.

Newnham also suggested that the industry may have dodged a bullet when the opposition Liberal Party blocked the government’s proposal to lift the gold royalty from 2.5% to 3.5% in October 2017.

"A negative change to the tax environment, after businesses have invested, will always shake confidence and put future investment at risk," Newnham said.