While strange at first glance, the upswing in insolvencies in businesses dependent on mining is a function of broader stress from restrictive monetary policy.
The May 2024 Business Risk Index from CreditorWatch today shows that, economy-wide, business insolvencies are now 40 per cent higher than the pre-Covid maximum, with close to 1400 recorded in May.
Court actions, which are often Tax Office enforcement, are also at a new peak, with 2506 recorded in May, up 970 over one year, compared with May 2023.
CreditorWatch analysis of business failure rates by industry shows that the average failure rate for mining was 41 per cent higher over the year to April 2024, with a failure rate for this sector of 5.08 per cent.
Food and beverage services was the sector with the highest failure rate at 7.54 per cent, followed by administrative and support services, then arts and recreation services and then transport, postal and warehousing.
Only then, ranked fifth, do CreditorWatch list construction, the sector attracting plenty of media attention with a failure rate of 5.15 per cent. Mining is sixth.
The failure rate in financial services was 3.93 per cent, presumably mainly mortgage and insurance brokers and financial planners.
Asked to explain the surge in failures around the mining sector, CreditorWatch CEO Patrick Coghlan said “the cost of capital is much higher than it used to be.
“Some of the more speculative mining operations are finding it harder to fund their operations.
“So it’s the supply chain that gets into trouble.”
Then asked to reflect on how bad conditions are likely to get, Coghlan said: “We’ll see an increase in insolvencies at a similar rate. It might taper off.
“The economy will only get worse for people and business. The only green shoots are the stage 3 tax cuts that will start to filter through from July, and then the first RBA cash rate cut.”
Perhaps less surprisingly, payment arrears are worst in the construction sector, where arrears of 60 days of more applied to 10.5 per cent of firms.
CreditorWatch’s assessment of the “worst regions” are concentrated in south-west Sydney and also the Gold Coast. Business defaults in these regions are estimated to range from 7 per cent to 8 per cent.