Poor Resource Sector Investment Returns to Persist

Speaking at the Melbourne Mining Club on Thursday, the South 32 chief executive lamented the mining industry’s “poor track record deploying capital” without offering any insights into how the future might be different. Having already been the chief financial officer of the world’s largest mining company, he seemed to be sheeting home the fault to a higher executive pay grade or, else, dopey directors. Australian national accounts data released on Wednesday reinforced the industry’s questionable use of capital. ABS data show March quarter mining industry profitability falling 85% below its 2011 peak to where it was in 2005. Since then, the Australian industry has invested a staggering $639 billion on which it is receiving no return. The blue line in the chart is an assessment of what the industry’s profitability would be if it was achieving an appropriate return on the capital it has invested. The industry’s current run rate (shown in red) is below target by around $66 billion a year leaving it a dauntingly high hurdle if it is to catch up over a full cycle.