By Rhiannon Hoyle
SYDNEY--China's shrinking demand for raw materials is pounding
companies that serve the mining industry, leading one large
Australian-listed drilling services firm Monday to describe
conditions as the worst since the global financial crisis.
Boart Longyear Ltd. (BLY.AU), the world's biggest provider of
drilling services to the mining industry, blamed the deteriorating
environment for its swing to a loss and thousands of job cuts in
the first half of its financial year. The company's shares closed
down 12% in Sydney after Boart said it didn't see any improvement
next year either.
In Australia, a sharp slowdown in mining investment has rattled
the resource-reliant economy as giants including BHP Billiton Ltd.
(BHP.AU) and Glencore Xstrata PLC (GLEN.LN) pare back investments
following a slump in commodity prices over the past year linked to
China's slowdown.
Mining services firms engaged engineering and drilling work tend
to be at the sharp end when mining companies scale back spending on
new projects.
Exploration spending cutbacks have been particularly harsh as
raw material producers worldwide focus on making their existing
operations more profitable. According to mining research firm SNL
Metals Economics Group, the exploration budgets of producers of
nonferrous metals--those like copper and nickel that don't have an
appreciable iron content and are generally more expensive--are
forecast to fall as much as 35% this year.
"We've seen a steady drop-off in spending," said Richard
O'Brien, Boart's chief executive, at an investor briefing in Sydney
on Monday. "Operating conditions and key performance indicators
have continued to deteriorate early in the second half of the year,
and are similar to levels experienced during the previous market
downturn in 2009."
Anticipating a resources slowdown, Australia's central bank
earlier this month cut its 2013 growth forecast to 2.25% from an
earlier 2.50%. Prime Minister Kevin Rudd also said in late June
that the China resources boom was over, while the government has
said it expects unemployment next year to tick up to its highest
level in a decade.
Boart has repeatedly downgraded profit guidance over the past
year as industry conditions have worsened. On Monday, it axed its
dividend payment as it unveiled a net loss of US$329.4 million in
the six months through June, compared with US$97.7 million profit a
year earlier.
Last year, Boart ousted its chief executive, Craig Kipp, after
four years in the job, following sharp declines in the company's
shares. The stock has continued to slide since then, and is valued
at a mere eighth of what it was around 18 months ago.
The Australian-listed but Utah-based company said it had cut
more than 2,800 jobs in the first half, adding to a similar
quantity of layoffs in 2012. Boart said it now employed about 6,300
people, down from 11,400 in the middle of last year.
Smaller drilling companies elsewhere have highlighted the
growing threat to their business from the slowdown in mining
investment globally. Singapore-based rival Capital Drilling Ltd.
(CAPD.LN) said last week it had shed hundreds of jobs and planned
to pare spending after its first-half profit slumped by more than
70%.
"The demand environment has continued to weaken," Capital
Drilling's Executive Chairman Jamie Boyton said in a statement.
BHP said it was putting the brakes on investment over the next
few years as industry shareholders bemoan the large spending
budgets of companies that had previously vowed to expand capacity.
Last week, BHP said profit fell 30%, its second annual earnings
decline, on the back of China's cooling economy, which has driven
the value of commodities like coal to multiyear lows.
In Australia, the resources sector accounts for almost 10% of
the nation's jobs--around double the level a decade ago--and close
to 20% of national output. In recent years, much of the employment
growth in the industry has come from companies that service mining
operations, including power generators, engineering firms, and
those that ferry raw materials to ports for export.
Earlier this month, WorleyParsons Ltd. (WOR.AU), another of
Australia's biggest mining services firms, highlighted a sharp
slowdown in industry investment, particularly in resource-rich
Western Australia. Mining services and chemicals group Orica Ltd.
(ORI.AU), which makes explosives used by the resources sector,
warned in July that earnings may fall as it launched a review of
all parts of its business.
Boart said Monday that the industry's current troubles were
possibly more serious than during the financial crisis because then
the issue was a temporary credit crunch while the blame lay now
with slowing demand for raw materials. That means the downturn
could last much longer, said Mr. O'Brien.
"We're fighting against a decline that is unprecedented in a lot
of ways," he said. "I don't think we're going to see an immediate
V(-shaped recovery) like we saw in 2009. I think it will be slower
for longer."
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
