Japan-based conglomerate Mitsubishi Corporation has decided to cut its budget and headcount for the AUD5.9bn (US$5.7bn) Oakajee Deepwater port and railway project in Western Australia. BMI believe that this decision by Mitsubishi on the long-delayed project supports our initial view that further delays could be in store for the Oakajee project. Going forward, we believe that there is scope for additional delays given the doubt still surrounding the project's economic feasibility.
This decision by Mitsubishi means that the Oakajee project is put on hold, with the workforce for the Oakajee project and the nearby Jack Hills iron ore project reduced from 115 employees to 44. Early this year, Mitsubishi became the sole sponsor for both projects after it bought out Australia-based Murchison Metal's 50% stake in the Oakajee port and rail project, and the AUD3.7bn (US$3.6bn) Jack Hills iron ore project. Mitsubishi had completed feasibility studies for both projects early this year, but had stated that it was unwilling to move forward with both projects without strategic partners to provide financing and secure clients. The Oakajee project was originally scheduled to be completed in 2015.
|Put On Hold|
|Oakajee -Jack Hills Mining Railway Project|
We believe this decision by Mitsubishi supports our view that further delays could be in store for the Oakajee project ( see our online service, May 17, 'Oakajee Project: Questions On Viability May Deter China'). Both Mitsubishi and the state government of Western Australia had wanted Chinese companies to invest in the Oakajee project as it was well suited for their interests. A number of major Chinese companies - Sinosteel and Angang Steel - own iron ore mines that could utilise the Oakajee project, while the mines around the Oakajee project produce the iron ore grade desired by Chinese steel mills.
However we stated that Chinese investors could be hesitant to take part in the Oakajee and Jack Hills projects given a potential lack of economic viability. This continues to hold true and could continue to create further delays. The estimated cost of the Oakajee project had ballooned from AUD4.4bn to AUD5.9bn in late-2011, with anecdotal evidence suggesting that the final cost of the project could already reach more than AUD7.0bn.
Meanwhile, this potential increase in the cost of the project comes amidst a cooling of demand for iron ore in Asia, including China. The main importers of Australian iron ore - China, Japan, South Korea - are experiencing a slowdown in economic activity and this poor macroeconomic environment could persist over the near-term, dampening the demand for Australian iron ore. According to the latest data from the Australian Bureau of Statistics, total volume of iron ore exports in Australia grew by just 2.7% year-on-year in September 2012, a nine-month low.
|Slowing Iron Ore Demand|
|Australia - Total Iron Ore Exports Volume, Kilotonnes, And Growth, % chg y-o-y|
Furthermore, it remains to be seen if Mitsubishi has the financial strength to support the project. The economic slowdown in Japan and across the world had adversely affected Mitsubishi's financial performance, with the company's net profit contracting for three consecutive quarters. With global economic activity expected to remain weak in 2013, Mitsubishi could continue to suffer net losses over the coming quarters.
|Mitsubishi - Net Profit, INRmn|
The recent dispute over the Senkaku/Diaoyu islands in the East China Sea have also played a role in delaying the Oakajee project ( see our online service, September 18, 'Sino-Japanese Island Dispute: Key Questions And Answers'). Media reports suggested that the territorial dispute led to a breakdown in discussions between Mitsubishi and potential Chinese partners. The continuing dispute could continue to be an obstacle in Mitsubishi's search for a suitable Chinese partner.
Lastly, we believe that there are still several agreements that need to be completed for the implementation of the Oakajee port and railway project, all of which could face further delays. Mitsubishi still needs to finalise implementation agreements with the WA government over the Oakajee project, receive approvals from the various bodies concerning the indigenous population, and secure supply chain agreements with the miners in the region.
This decision to put the Oakajee project on hold chimes with our view that engineering construction activity in Australia is unlikely to reach new-highs over the near-term as several miners in Australia have scaled down or deferred their capital expenditure plans (in BMI's terms, the engineering construction sector includes construction works in the transport and utilities infrastructure sectors as well as the commodities sectors). In recent months, several prominent miners such as BHP Billiton and Aquila Resources have announced a wave of project deferrals, cancellations and spending cuts in the mining sector and we believe this has started to dampen engineering construction activity over the coming months ( see our online service, October 24, 'Construction Sector: Engineering Slowdown Imminent').