Good luck finding an underground engineer – ShareCafe
by Dion Hershan – Head of Australian Equities
We have just returned from visiting Perth for the first time in two and a half years. There’s a clear echo of 2010’s style: everything you’ve heard and read about “request help” signs, $8 lattes, and Uber’s skyrocketing prices seems to be true. The implications, however, are much broader. If you can’t find an Uber driver, good luck finding an underground geotechnical engineer!
With the economy booming, the recent surge in commodity prices (+16% year-to-date, 39% YoY) yet to filter through and state unemployment at a lean 2.9%, the pressure is mounting. This positive year-to-date shock is worth around $94 billion to Australia, primarily to Western Australia given that it is at the epicenter of the iron ore industry (exports of 186 billion dollars at spot prices*), LNG (Australia is the world’s 3rd largest exporter) and lithium (#1 producer and ramping). You can see why many locals want to secede and get their GST receipts back!
The projected investment boom (on a depressed basis) seems almost impossible to achieve, and hyperinflation for construction and disappointment in production seem inevitable. However, so do higher commodity prices as markets are likely to remain tight. Given that WA accounts for over 60% of Australia’s exploration spending (see chart 1) and is clearly number one for construction activity, this is a dynamic of critically important to the Australian economy.
For the Australian resource sector to realize its potential, it clearly needs it; (i) a large influx of skilled migrants and appropriate environmental permits that can be expedited; (ii) companies/executives take the risk and order long lead items (there are 2-3 year waiting lists for critical equipment) and (iii) a lot of luck. Australia’s need to deliver is also critically important to global decarbonisation, with 50% of projected lithium production growth to 2030 expected to come from Western Australia.
Our base case is that bottlenecks are a real impediment to volume growth and high forward-looking commodity prices could persist for some time. With this in mind, we remain overweight producers Independence (Lithium, Nickel), Oz Minerals and Sandfire (Copper) and BHP (diversified) and underweight companies with large speculative/blue sky projects.