The resources industry is in recession – so get ready to eat Kopi Luwak

The resources industry is in recession – so get ready to eat Kopi Luwak

Kopi Luwak refers to the beans of coffee berries once they have been eaten and excreted by the Asian Palm Civet. Passing through a civet’s intestines, the beans are then defecated with other fecal matter and collected, dried and eaten or drunk… or perhaps eaten by drunks.

You can see the dung that people consume in the picture to the left. Kopi Luwak has been called the most expensive coffee in the world with retail prices reaching €550 / US$700 per kilogram.

Coming back from lunch today, the Montgomery team remembered how expensive Australia is to hire staff, rent commercial space, drive a car and simply live. And having discussed Australia’s prospects with another fund manager at lunch, it occurred to us that the resources industry is the bean, the cat is the economy and the defected remains are what we will all have to swallow shortly.

Today, the Worley Parsons conference call revealed the change in trading conditions in WA (i.e. down) is worse than what they saw during the GFC. In terms of the rate of deterioration, WOR thought they were close to the bottom back in February, but market conditions have deteriorated further since.

Here’s a list of recent statements made by others with exposure to civets:

“Ongoing uncertainty and volatility in commodity markets have driven a continued slowdown of capital investment in the resources and infrastructure sectors with further delays of major projects impacting revenues in the Engineering business. Additionally, the cost management programs of the major miners have led to scope reductions and cancellations across UGL’s operations and maintenance business.” – UGL Managing Director and CEO, Richard Leupen – market update

“Market volatility and weak conditions in the Australian resources sector continue to provide a challenging trading environment. While recent conditional environmental approvals for key projects were positive signs, continuing delays in final environmental and investment approval has resulted in further project slippage with flow-on impacts on anticipated revenues in the second half of FY13.” Sedgman – market update

“Just pulling more tonnes out of the ground is not enough. The mining sector has experienced significant cost increases in recent years, and it continues to do so. In addition, stakeholder expectations of the industry have also grown … We are targeting cumulative cost savings of US$5 billion over the next two years. This will be achieved through a relentless focus on cost reduction and productivity improvement across all areas of our business.” – Sam Walsh, Chief Executive, Rio Tinto – AGM

“We must challenge ourselves to increase returns from new investment, in the same way that we need to squeeze returns from our installed instrastructure. IN this regard, capital and exploration expenditure for the 2014 financial year will decline significantly, to approximately US$18 billion, and the rate of spend is expected to decline substantially thereafter. By reducing our annual spend and increasing internal competition for capital, we expect to maximise returns from incremental investment…” – Andrew Mackenzie, Chief Executive Officer, BHP Billiton – 2013 Global Metals, Mining and Steel Conference

“Ausdrill’s core business comprising of mining services in Africa and Australia has largely continued to perform as expected due to the focus on production related services. However, the Group’s profits are expected to be impacted by the general slowdown in activity in the Australian mining sector that has occurred from September 2012 onwards, and which has not recovered as previously expected.” – Ausdrill Limited – market update

Nikki Williams, CEO of the Australian Coal Association, said on SBS in January that the Australian coal sector is at “a terrible junction where not only has the international market come off in terms of prices, but our costs and productivity have gone to a terrible place,” … (Until recently Australia was the cheapest place in the world to produce coal) … “And in just five years, we’re now the highest cost producer in the world at $176 a tonne compared to the rest of the world at $106.”

The head of engineering firm, Coffey International, has warned of a protracted economic downturn far wider than the slowdown in the mining sector, with an ‘increasing cascade’ of project delays and cancellations and little chance of a recovery for some time. “What we have been seeing is significant project delays or cancellations that were broader than simply mining,” Coffey managing director John Douglas told The Australian.

Our friend and fellow portfolio manager has just returned from an whirlwind tour of Chinese steel mills to discover that (unsurprisingly) China believes losing money in this industry is acceptable because of the benefits elsewhere in the economy. Keeping people employed is also a priority. Meanwhile Australia’s largest iron ore producers are committed to producing even more. The price of iron ore is going one way.

If you remember that it was the resources industry that kept Australia out of a recession (sound economic management had little to do with it, Canberra), our question is – what will keep us out of recession now that the resources industry is in one?

We already know Australia is the most expensive place in the world – the legal minimum wage DJs or Myer have to pay an inexperienced uni student as floor staff on a public holiday is $54/hour – but what we may not have known is that this expensive stuff we are all about to be force fed comes from the rear end of the world’s problems.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.