The slowdown in the resources sector continues to sorely afflict mining services firms, with ASX-listed players collectively losing $12 billion in market value in just the past six months.
A new research report by Ernst and Young has found that the total market capitalization of 84-ASX listed mining services companies fell a stunning 16 per cent during the period from December 31 to June 13, from roughly $76 billion to $64 billion.
Almost half of Australian listed companies deriving a significant percentage of their revenues from mining related services had issued profit downgrades in the past half year, and a third of these have done so in just the past three months.
The woes of Australian mining services companies are of course intimately tied to the slowdown in the resources sector, prompted chiefly by easing growth in the key export market of China.
“The reasons behind the downgrades come as no surprise, with the most cited primary reason being deteriorating market conditions, followed by impairment of assets and deferral of projects,” said Vince Smith, EY Oceania’s head of corporate restructuring.
As onerous as the woes of mining services companies have been thus far, the Ernst and Young report says their troubles are set to persist for at least another six months to a year.
With the Australian resources sector transitioning from the construction to production phase, companies will be forced to adjust to new conditions in which investment sharply declines and there are fewer new projects arriving online.
The sector has already seen a sharp increase this year in the number of major resource projects which have been shelved or deferred as a result of cost blowouts.
Towards the end of May the Bureau of Resources and Energy Economics (BREE) released figures which showed that Australia had lost $149 billion in investment on 18 key resource projects in a 12 month period, indicating that 2013 could well be the year that the “commodities supercycle” reaches its terminus.
Ernst and Young expects mining services firms with a more varied portfolio of services to best weather this transitional period from construction to production, which will see the needs of industry will shift considerably.
“Diversified mining services businesses (have) been strong performers,” the company says.