IN THE early 1990s the mining town of Newman in Western Australia was in a deep slump. Its population had dwindled to 3,000 from a peak of 15,000 in the 1970s. Thanks to extraordinary demand (and prices) for commodities, primarily from China, migration has since been reversed. The population is nearing 11,000 and no tour of the local streets is complete without pausing at a home that was recently sold for A$800,000 ($770,000), having fetched A$80,000 just a few years ago.
The region is still thirsting for people. There are acute shortages of diesel-engine mechanics and electricians, as well as cooks and even jackaroos (cowboys). Lorry drivers can earn in excess of A$120,000 a year, plus benefits and vacations. Bringing in more people is tough because the waiting list for the kind of manufactured homes that can be brought in on trailers—the fastest solution to a housing shortage — is more than a year.
Commercial space is in short supply too. Bankers and mining companies have piled into Perth, the financial capital of Western Australia. Rents can exceed those in New York and London, if property is available at all. UBS, a Swiss bank, is working out of a temporary service office.
But even in Australia, a country with economic growth, rising corporate profits and stable home prices, there is growing financial distress. Mortgage credit will expand by less than 10% for the first time in 40 years in 2008, reckons Craig Williams, an analyst with Citigroup. The Australian stockmarket is down by 26% since its peak in November. Banks have been hit harder still, although they are not nearly as ravaged as those in America and Europe.
In part, the problems are a result of Australia’s split economy. The mining boom has produced wealth in the west while pushing up the Australian dollar, thus undermining the competitiveness of manufacturers in the more populated east. In part, the problems are also a product of a country with a low savings rate whose banks and financial institutions have relied on foreign sources for half of their funding. Thanks to the capital crises in America and Europe, credit is now much tighter. Collectively, these two forces are reshaping Australia’s financial sector.
First in the firing-line has been a series of debt-laden financial and real-estate companies. Centro Properties, an acquisitive mall operator, blew up last December. Others are sweating through brutal negotiations with lenders. Allco Finance Group managed to negotiate a loan extension with its bankers on July 1st in return for higher interest charges and a promise to cut its debt. Babcock & Brown, which manages a string of leveraged infrastructure funds, has also had to accept higher interest rates in order to stave off nervous creditors (although it was helped on July 23rd by a solid set of results from Macquarie, a bank with a similar business model).
The banks themselves are also under pressure. Adelaide Bank, which was heavily reliant on wholesale funding, was purchased last year for A$4 billion by Bendigo Bank, which is funded mainly by retail deposits. The proposed A$19 billion acquisition of St George’s, the country’s fifth-largest bank, by Westpac, its third-largest, partly rests on Westpac’s claim that it can fund itself more cheaply.
Even the miners are not immune. In 2000 there were only three companies producing iron ore in Western Australia, says an executive at one of the mining giants. With prices surging and resources in the Pilbara region abundant, by late last year 95 had announced production plans. The oxygen of capital has now thinned dramatically for the newcomers.
Mining companies tapped stockmarkets regularly in 2007, often raising just enough money to pay for a limited period of exploration and drilling. This year the market for initial public offerings has collapsed (see chart). If the financial spigot does not open again, most of the new entrants will disappear. That is not all bad. Tightening credit and a more discriminating equity market may be accomplishing what no business would do on its own: tamping down on supply to moderate the prospect of a future bust. Would that lenders everywhere had done the same.