Resources Slowdown – coming to a business near you

We are reminded daily of the effects of declining investment in mining construction and the collapse in commodity prices on the Australian economy. This has been highlighted in the 2016 federal budget where the Federal Government realises the mining investment boom is over and it is trying to stimulate the economy and job growth through investment in infrastructure and reducing tax on business, in turn encouraging businesses to reinvest in the economy.

The big picture is played out in the media through reports of high profile corporate collapses such as Kimberley Diamond Company, Queensland Nickel, BCD Resources and more recently the steel maker and iron ore miner Arrium. Many others have contracted their operations to preserve cash. 

The flow on effect can be devastating on smaller enterprises that are often dependent on reliable cash flow from these larger companies as their sole or largest client. In the year to September 2015, Australian Securities and Investments Commission statistics show the number of external administration appointments was 5,649 – an increase of 486 or 8% from the figures reported in 2014.

Businesses that once relied on the strength of the mining industry should be concerned about the effects that the mining downturn will have on their financial position, financial performance and ability to meet their debts as due and payable. The recent decision of Rio Tinto (now reversed under political pressure) to unilaterally extend payment terms to its suppliers from 45 days to 90 days is a case in point.

A recent report indicated there has been a 46% fall in the value of Australian “yellow goods” (plant & equipment) in the year to September 2015, directly attributed to reduced demand for this type of equipment in the mining sector. For mining service companies this can be particularly hard as it not only affects the balance sheet but may lead to credit defaults or difficulties in sourcing new credit.

The commercial property market is also not immune. The Property Council recently released a report that showed Perth’s office vacancy rate hit 19.2% in January 2016, a 21 year high, and climbing since 2013 due to mining companies vacating prime office space to cut costs as a result of the decline in commodity prices.

The effects also ripple down to businesses not directly reliant on mining, for example communities with high resident populations of FIFO workers, many of whom work across state borders. Their spending power, even if still employed, is diminished in the present economic circumstances.

Australian consumer confidence fell heavily in April with the Westpac-MI consumer sentiment index sliding 4% to 95.1. It will be interesting to see if the budget announcement aimed at boosting consumer confidence coupled with the reduction in the official interest rate to a record low of 1.75%pa can do the trick. 

All businesses, not only those in resource rich states, should be conscious of the ripple effect of the changing Australian economy and taking steps to transition to the new order. That may require a critical examination of all aspects of business operations to identify any causes for concern or actions which may help prevent financial hardship.

RSM’s Restructuring & Recovery experts can help across all industries and regions in Australia. Please contact us for detailed information.