By Rhiannon Hoyle
SYDNEY--Service companies that rode the wave of investment in
Australian resources are facing harder times, reporting a slew of
earnings downgrades and preparing to move their focus overseas as a
decade-long mining boom slows.
Transfield Services Ltd. (TSE.AU) and Boart Longyear Ltd.
(BLY.AU) Tuesday became the latest contractors in the sector to
warn that profit would be weaker than anticipated, and to announce
sweeping job losses as they adjust to an oncoming peak in mining
investment.
Australia's resources sector accounts for almost 10% of the
country's job market--about double the level a decade ago--and
close to 20% of national output. In recent years, much of the
employment growth has come from companies that service mining
operations, including power generators, engineering firms, and
those that transport raw materials to ports for export.
However, the future of those companies looks increasingly
uncertain as customers such as BHP Billiton Ltd. (BHP) and Woodside
Petroleum Ltd. (WPL.AU) scale back their investments as projects
reach completion, or else shelve those whose costs have escalated
to focus instead on production from their existing assets.
BHP's new chief executive, Andrew Mackenzie, pledged this month
to put the brakes on investment over the next few years, responding
to shareholder concern over the massive spending budgets mining
companies have dedicated to expanding capacity, even as commodity
prices fell sharply last year.
Australia's central bank has sought to manage the shift from
soaring investment to a less labor-intensive production phase in
the resource industry by lowering interest rates to a record low
this year, hoping to boost consumer spending so that other parts of
the economy are able to absorb job losses in vulnerable areas such
as mining services.
"The downturn in capital and exploration spending in the mining
sector globally has clearly reduced the demand for drilling
services and products," Boart Longyear's Chief Executive Richard
O'Brien said on Tuesday, as the company revealed that it had cut
more than 1,000 jobs this year.
Separately, Transfield said it would axe 113 positions as it
struggled with cutbacks and project cancellations within the mining
industry. It is the second time the company, whose shares fell 24%
to record low in Sydney, has lowered its profit guidance this
year.
The slowdown has deepened rapidly in recent months, contractors
say, echoing a government report that showed unemployment rose at
an accelerating pace in the most resource-rich state of Western
Australia last month, while remaining steady or falling in less
mining-dominated parts of the country.
"Since [late April], it has become even clearer that the
Australian economy is contracting," Coffey International Ltd.
(COF.AU) said in a statement to the market last week. "We have had
to respond to deteriorating Australian market conditions and
resultant project delays" through cutbacks including 150
redundancies, the geosciences and project management firm said.
WorleyParsons Ltd. (WOR.AU) said its business here had also been
hit. The company, which had previously forecast earnings growth for
the year to the end of June, said it now expects net profit of as
little as 320 million Australian dollars (US$314 million), compared
with last year's A$345.6 million. Service companies UGL Ltd.
(UGL.AU) and Sedgman Ltd. (SDM.AU) have also issued profit warnings
this month.
In addition to shelving projects, companies like BHP have been
cutting operating costs at their existing mines in a bid to boost
profit margins. In April, the world's biggest mining company
prematurely axed a contract with Leighton Holdings Ltd. (LEI.AU)
and replaced the contractor with a cheaper private firm.
The picture may not be as bleak as it appears, according to Wood
Mackenzie, a consultancy that studies the resources industry and
expects investment to peak this year at 85 billion Australian
dollars (US$84 billion). It sees robust investment for a while to
come thanks to committed gas projects such as the US$34 billion
Ichthys liquefied-natural-gas facility in Australia's Northern
Territory, and the resumption of previously deferred coal
developments as prices rebound from depressed levels linked to
China's slowdown last year.
That prospect hasn't stopped some mining services companies from
looking offshore for growth.
"It is clear that we need to move our focus from an
Australian-centric approach to one where we export our skills to
markets where our services are valued," Leighton's Chief Executive
Hamish Tyrwhitt said at the company's annual general meeting on
Monday. He said the contractor was looking at India, southeast Asia
and sub-Saharan Africa as places to expand into.
WorleyParsons, meanwhile, has said it plans to target China and
the U.S. to help offset the weakness in Australia's mining
sector.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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