Mining boom slowdown: domino effect increases credit risk

by |

Are you keeping a close eye on your creditors? The mining boom slowdown could be hitting the companies that your organisation does business with hard.

The resource industry almost single-handedly helped Australia through the global financial crisis, so Resources Minister Martin Ferguson’s comments that “the commodity price boom is over and anyone with half a brain knows that”, should send a chilling call to risk professionals.

With a drop-off in enthusiasm for big projects, such as the shelving of Olympic Dam by BHP, it’s suggested a further $400bn-worth of projects are at risk.

Data from Veda suggests that the mining slowdown is already taking its toll in Western Australia.

Moses Samaha, head of commercial risk for Veda, says the influx of new business, which led WA to be known as the “land of the opportunity”, is now tapering off.

“Based on what we are hearing from our clients in WA, it would appear that the state has its own two-speed economy; SMBs in WA that do most of their business with the resources industry are still faring ok despite a degree of slow-down,” he said.

However, his warning to risk managers is that “SMBs that are reliant on business with other industries are really struggling”.

“Clients are reporting that larger numbers of SMBs have been seeking additional credit or extended terms, which our risk management tools show to be a strong indicator of a business under financial stress,” he added.

Financial stressors are wide ranging, said Samaha, with ASIC ‘s data finding that the key reasons for insolvency are poor strategic management of the business, inadequate cash-flow or high cash use, trading losses and poor financial control – including lack of records.

To effectively monitor risk, Samaha suggests starting “with checking the new customers up front, which includes not just looking at the business but also the people behind the business”.

It’s also vital to monitor customers to ensure “any future adverse events are made obvious earlier”, he added.

Samaha recommends that before offering credit or signing any new customers, businesses adopt the ‘five Cs’ of credit – character, capacity, capital, cash flow and conditions – and use these as a guide in assessing the credit risk of potential creditors.

More stories:

Credit risk skyrockets

Corporate Risk & Insurance forum is the place for positive industry interaction and welcomes your professional and informed opinion.

Name (required)
Comment (required)
By submitting, I agree to the Terms & Conditions