Australia has benefited greatly from the mining boom. China’s ascension throughout the 2000s caught some analysts by surprise but elevated commodity prices and then mining investment helped Australia through the global financial crisis and kicked off an unprecedented period of prosperity.
The mining investment boom is now over and the third phase of the boom, resource exports, is underway. But that process hasn’t been smooth. With iron ore and coal prices plunging more quickly than most analysts predicted, exports have increased, but the value of those goods has taken a beating, squeezing margins and forcing some iron ore miners into administration.
Earlier today, the Reserve Bank of Australia’s head of economic analysis, Alex Heath, provided a brief overview of the mining boom and how it might affect the domestic economy going forward.
The sharp rise in commodity prices led to an unprecedented period of economic prosperity for the Australian economy. The terms of trade rose to its highest level in history and the pick-up was more persistent than previous episodes.
As Chinese demand surged, mining investment eventually followed suit. It’s important to remember that there is a significant lag between the rise in prices and the investment response. Resource investment projects take a long time to plan, finance and complete.
Mining investment peaked at almost 8 per cent of GDP in 2013 (from around 2 per cent prior to the boom). This underpinned employment growth since mining investment is labour-intensive. As the boom ended, employment began to ease, since the extraction of resources is a more capital-intensive activity.
Bank estimates from either this year suggested that the mining boom lifted living standards, as measured by real per capita disposable income, by more than 10 per cent over the past decade (The mining boom’s final days may come quicker than expected, August 25). Current bank forecasts see mining investment declining by almost 4 percentage points of GDP over the next few years.
In the past couple of years, the mining boom has shifted gears and the results have not been so lucrative. Resource exports continue to underpin the Australian economy but this phase has been by far the weakest part of the boom.
According to Heath, “iron ore and, to a lesser, extent, coal exports are expected to continue to make a positive contribution to GDP growth in the next couple of years as productive capacity continues to ramp up.” She adds: “LNG production capacity will also start coming on-line over the next year, which will provide another significant boost to resource exports.”
This may prove to be correct but it is far from certain. China appears increasingly willing to facilitate its own economic transition, from building homes and infrastructure towards consumption and exports. Chinese steel production, for example, eased slightly over the year to October.
According to Fairfax Media, China has also placed a cap on coal growth of 5 per cent per year for the next seven years. The State Council (China’s cabinet) said annual coal consumption would be held at 4.2 billion tonnes in 2020 (up from 4 billion tonnes currently).
The recent joint announcement by China and the United States on carbon emissions underpins the shift away from relying on coal. How this will play out is uncertain -- we are, after all, discussing developments over the next 10 to 15 years -- but it presents a considerable challenge for the Australian economy.
As a result, China’s economic transition could be particularly debilitating for the domestic outlook since, beyond commodities, we really don’t produce anything that China wants. We need to remember that from a growth perspective we need China to consume more iron ore and coal each year. It isn’t merely enough that they consume a lot of it.
Chinese urbanisation will continue and it still needs vast infrastructure investment to catch up with other developed countries. But that doesn’t necessarily mean it has to ramp up commodity use; instead it could cut infrastructure spending by a massive amount and still be spending more than other developed countries.
We also cannot ignore the spillover effects from the decline in our terms of trade. Export volumes may be rising but the value of those goods have declined. Heath notes that the “fall in Australia’s terms of trade is expected to weigh on household income.”
If the terms-of-trade boom increased household disposable income per capita by more than 10 per cent, then the sharp decline in the terms of trade will naturally unwind some of that. The reality is Australia faces a number of years of soft income growth that will partially offset the benefits from higher exports.
The first two stages of the mining boom were unambiguously positive from an economic standpoint; Australia benefited a great deal. The third phase is a lot less certain and, with China’s ongoing transition, it may not prove persistent.
China’s transition is all but certain to weigh on Australia’s mining interests. There have already been victims, but that’s the price we pay for disproportionately relying on resources to drive growth. Over the next decade we will have to diversify our export base to offset the effects of China’s renewed focus on household spending and exports, otherwise we run the risk of a prolonged period of sub-trend growth.