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The end of good times? The mining boom re-examined


Hungy Ye

By

September 2nd, 2013


Hungy examines if the mining boom has really come to an end and what this could potentially mean for the shape of Australia’s future economy.


This article is one of two Q&A specials informing the reader on a topic of economic importance to Australia that was discussed by the panel on the night.

In the past few years Australia has experienced one of the longest and largest increases in the value of the mining sector, seeing it grow to account for approximately 52% of all exports produced by Australia and worth $164 Billion a year[1]. Similarly, mining related investments in Australia now comprise some 40% of all investments undertaken, up from 10% before the boom and accounting for $80 billion a year — more than any other country in the developed world.

This has been lead in part by Australia’s trade partners, particularly developing countries in Asia,  whose rise in recent years has driven Australia’s terms of trade and global commodity prices through the roof.

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Figure 1: Australian Exports by Sector. Credit: Grattan Institute[7]

However, of concern of late has been the drop in the commodities price index (Fig. 2) which contains Australia’s primary mineral exports such as coal and iron ore, as well as the perception of increasingly muted demand out of Asia (China in particular). Incumbent Prime Minister and Labor election candidate Kevin Rudd was quoted saying “The truth is, with the end of the decade-long mining boom, we face new economic challenges” on national television just a few weeks ago during the first election debate[2].

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Figure 2: Commodity Price Index & Australian Terms of Trade/FX rate. Credit: Grattan Institute[7]

So, is the mining boom really over, and, if it is, what does that mean for the source of Australia’s economic growth in both the near future and long-term? What Rudd was referring to by the end of the ‘boom’ may more specifically be described as a combination of the peak of global prices for mineral ores and the mining investment cycle.

On the demand side, in the past few years China has had a huge appetite for mineral ores due to infrastructure spending by the central government, in their attempt to avoid the global recession brought on by the 2008-09 financial crisis[3]. However, this demand has fallen, as can be observed by a steady drop in the Purchasing Managers Index (PMI) over the years post-GFC. The PMI itself is an indicator which shows the month-on-month change in the buying activity of business and is a good predictor for future economic activity; where 50 represents no change on the previous month[4].

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Figure 3: China’s PMI. Credit: Business Insider

It’s generally accepted that the spike in commodity prices (see figure 2) in recent years has been closely linked to China’s strong demand for raw materials[5]. As this slows, it will definitely be reflected in the price levels. However, though growth has slowed, China is definitely still growing, and being Australia’s largest trade partner this could mean that whilst commodities prices have seen their peak, the quantity of resources demanded may not drop off precipitously just yet.

The other key driver behind Australia’s mining boom for the long-term is the investment into Australian mining projects. After the rapid rise in demand which caused the rise in commodity prices itself, huge amounts of capital were invested in the mining sector to increase production capacity. This has lead to rapid growth in the GDP of mineral producing regions, leading to an uneven increase in Australia’s GDP which was the cause behind the ‘two-speed economy’.

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Figure 4: Mining Investment outlook. Credit: BREE

However, as the prices of commodities fall, so does the planned investment into the mining sector according to data compiled by BREE (See Fig. 4). This means that while in the short to medium-term capacity is actually likely to increase, unless another major source of demand for minerals emerges this is unlikely to be a driver for long-term economic growth. This is the nature of mining booms: rapid rises in commodity prices due to a sudden spike in demand followed by capacity expansion and a steady extended cool down period when demand and supply establish equilibrium post-boom[6].

The mining boom is not really ‘over’, but beyond its peak and unlikely to achieve as spectacular results as the doubling of the nominal output of our mining states over the past 10 years. Growth in Australia’s output growth would be about 70-80 percentage points lower without the contribution of the mining sector[7]. If we are to maintain our economic prosperity and international competitiveness there will have to be shifts to other sectors of the Australian economy, lest we become no more than just a quarry for the international community.

With the election just around the corner, this raises the natural question of where our politicians sit on this issue and what they have in mind if elected. All eyes will be on whichever party is elected into office on September 7th to rise to the challenge.

What do you think? Is the mining boom really over and, if so, what should Australia be doing about it?

 

Footnotes:

[1]: Bureau of Resources and Energy Economics (BREE) 

[2]: http://www.politifact.com.au/truth-o-meter/statements/2013/aug/15/kevin-rudd/mining-boom-over-or-taking-different-hue/

[3]: Zhang, L. (2009). China’s Policy Responses to the Global Financial Crisis: Efficacy and Risks. Beijing: Central University of Finance and Economics.

[4]: http://www.investopedia.com/university/releases/napm.asp

[5]: http://www.scmp.com/business/economy/article/1294916/decade-long-australia-mining-boom-turns-bust

[6]: HSBC. (2012). Australia’s great rebalancing act: Looking beyond the mining investment boom. Melbourne: HSBC Global Reserach.

[7]: Grattan Institute. (2013). The mining boom: impacts and prospects. Melbourne: Grattan Institute.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Dave Sharpe

    Hi Hungy. Nice article. I think there is way too much focus on whether the boom is over or not in the mining sector vs a robust discussion and policy towards other sectors of the economy and making them sustainably competitive. Outside of mining our economy has struggled in terms of productivity and growth. Business investment has been well down in non mining sectors and this has to change. Our leaders need to be discussing how we stimulate these sectors and lessen our dependence on resources and lessen the caution shown by business in investing in non mining sectors. Dave

    • Oliver Jiang

      “Business investment has been well down in non mining sectors and this has to change.”

      Why? Why does it have to change? This is a free market economy, is it not? If something is unprofitable or uneconomical to continue, why should we artificially prop it up so that it can survive? Australia has always been a resource country, whether it’s agriculture or mining. We’re an export economy (even education comes under exports), so why do things “have to change”?

      • Hungy Ye

        Hi Dave and Oliver,

        I think it’s no secret that raw material demand has been at an all time high in the past few years and as Oliver says of course the free market dictates that increased demand must be met with increased supply, hence the boom. My intention was to try and find the facts to clarify whether or not we have really entered a ‘post boom’ economy as some have claimed.

        It’s also true that the mining boom cannot sustain us forever, and the next big question is of course which industry Australia should focus on next and it’s a much bigger question that whether the mining boom is over or not.

  • Jeff

    I think Dave must have been referring to the fact that the government must figure out ways to boost productivity and growth in other non-mining sectors given the slowdown in the mining boom. Our economy would still be export-focused (and that’s important given that we rely extensively on trading our exports to China and other countries), but definitely, there’s a need for the other sectors (e.g. retail/ manufacturing) to ‘pick up the slack’ if we want to see continued growth.

    • Dave Sharpe

      Thanks Jeff, you are spot on in terms of what I was referring to. There are ways of supporting growth and competitiveness in other sectors that is not “propping them up” . Providing an environment that encourages an innovation economy such as revision of tax treatment of employee share ownership and commercialisation of innovation are examples of such initiatives. The more diverse our economy the more sustainable it will be. By the way Oliver, in my initial response to Hungy I was not referring to the hand outs given to the failing industries like our car manufacturing industry: an industry that seems more successful at getting hand outs from government than making competitive vehicles. Cheers Dave

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