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

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.