Mining Boom in Australia Edges Past Peak as UGL Touches Low

Signs are intensifying that the mining boom is topping out in Australia, the biggest shipper of iron ore and coal, with engineering contractor UGL Ltd. falling to three-month low after joining rivals in making job cuts.

“The peak is unquestionably behind us” for the resources boom, Richard Leupen, chief executive officer of the Sydney based company, said yesterday on a call after UGL, whose clients include Rio Tinto Group and Royal Dutch Shell Plc, trimmed 700 jobs when reporting a 53 percent drop in first-half profit.

“We expect the peak in Australian resources and energy capex to come through in the next 12 months,” JPMorgan Chase and Co. analysts Anthony Passe-de Silva and William Eu Nam Loh said yesterday in a report. “This peak has been accelerated by the pullback in capex intentions in the bulk commodity sector.”

Global miners led by BHP Billiton Ltd., the world’s biggest, are reigning in spending, slowing expansions and delaying projects on expectations that commodity prices have passed their highs. The Reserve Bank of Australia this month reduced its economic growth forecast with Governor Glenn Stevens observing that the economy is adjusting to the peak of the mining boom.

UGL, which also as property and rail divisions, fell 0.9 percent to A$10.21 at market close in Sydney, its lowest since Nov. 16. The stock earlier touched A$10.02, the lowest since the close on July 8, 2009.

Boart Longyear Ltd., the world’s biggest provider of mineral-drilling services, and Macmahon Holdings Ltd. are among mining services companies that have made jobs cuts in the past six months as their shares have tumbled. Iluka Resources Ltd., the world’s biggest zircon producer, BlueScope Steel Ltd., Australia’s biggest steel mill, and Boral Ltd., a building materials supplier, have announced a total of about 1,300 job cuts this year.

Pressured Gillard

These job losses will add pressure on Prime Minister Julia Gillard who is facing an election while trailing in the polls and battling on multiple fronts from the economy to political scandals. Her bid to promote her government’s economic credentials is being damaged by weaker growth, lower commodity prices and a strong local currency that’s curbing tax receipts.

BHP, which this month reported a 58 percent decline in first-half profit, last year mothballed two major projects in Australia. The expansion of the Olympic Dam mine in South Australia, estimated by Credit Suisse Group AG to cost $33 Olympic billion, and its outer harbor iron ore project in Western Australia, estimated by the bank at $22 billion.

“We’re seeing all - almost all the major corporates talking about being much more careful with their capital investment programs,” said Leupen, who said he’s optimistic for the long-term outlook for the Australian resources sector.

Iron Ore

An expected slowdown in demand for minerals over the next five years makes cutting costs and boosting productivity a priority, Andrew Mackenzie, the incoming chief executive officer of Melbourne-based BHP, said this month in an interview with the Australian Broadcasting Corp. Marius Kloppers, who he will succeed in the top job on May 10, said Feb. 20 there won’t be a return to the peak commodity prices of 2007.

The price of iron ore, BHP’s most profitable unit, averaged 27 percent lower during the six months to Dec. 31, data from The Steel Index Ltd. shows. Iron ore is now trading at about $151.90 a metric ton, near the highest since October 2011. Prices may tumble to $110 a ton by the end of the year, as mines in China boost output, according to Westpac Banking Corp. BHP joined Rio Tinto Group and Anglo American Plc in reporting a drop in earnings as waning global growth prompted the lower prices.

For the month, the Australian dollar, which has remained above $1 for almost eight months -- the longest stretch since exchange controls were scrapped in 1983, is set for a 1.4 percent drop versus the U.S. dollar, the biggest since August.

Building Evidence

“The evidence is building that a peak in investment cycle is fast approaching in the first half of this year, if not already happening in some sectors of the mining industry,” Greg Gibbs a Singapore-based senior currency strategist at Royal Bank of Scotland Group Plc., said today in a phone interview. “The risk is the Aussie dollar will continue to trend down.”

Australian companies are forecast to spend A$152.5 billion ($156.6 billion) in 2013-2014, compared with an estimated A$168.2 billion in 2012-2013, the Bureau of Statistics said today in Sydney. Fourth-quarter capital spending fell 1.2 percent from the previous three-month period, when it rose a revised 1.1 percent. The median estimate of economists surveyed by Bloomberg News was for a 1 percent increase.

(Updates with closing shares in fifth paragraph.)
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