The mining sector is unlikely to see a second boom despite the recent strength in commodity prices, according to ANZ.
Commodity prices “rebounded strongly” in 2016 off the back of higher-than-expected demand, OPEC’s announcement of oil production cuts and the increased speed at which Chinese steel production shut down, ANZ said. The bank, however, said several other factors make a second boom unlikely.
“The significant lead times between rising prices, exploration activity, and project identification and commencement means that we do not expect a pick-up in investment over the near term,” ANZ said.
“Exploration activity remains at subdued levels, meaning that any flow-through impact on investment is some time away.”
While commodity prices are unlikely to reach the same heights as seen in the previous cycle, ANZ said prices are also unlikely to “return to the troughs of early 2016” moving forward.
The primary driver for bulk commodity markets will continue to be developments in China, ANZ said, noting that the Chinese authorities’ focus on overcapacity in a number of industries should be “supportive of steel, iron ore and coal prices”.
The bank said it expects OPEC production cuts to similarly support oil prices.
“In all, while it appears that commodity prices have recovered from last year’s weakness, much stronger and more sustainable improvements in prices would be required to support a significant upswing in the investment outlook,” ANZ said.
“As a result, we retain our view that mining investment in Australia will continue to decline over coming years.”