Bust of the boom won't stop sector from growing
THE biggest thing that worries many people about the resources boom is that word "boom".
This week, two economists at the Reserve Bank, Vanessa Rayner and James Bishop, published a research paper neatly answering that concern. In short, what we'll be left with is a very much bigger mining sector.
The trick is that this boom is actually as much structural (lasting) as cyclical. Australia has had commodity booms in the past, and almost all of those were transitory.
From about 2004, the prices of coal and iron ore began rising strongly until they'd taken Australia's terms of trade - the prices we receive for our exports relative to the prices we pay for our imports - to their most favourable level in 200 years.
The main thing making this price boom so different (apart from it lasting a lot longer) is that it precipitated a second boom: investment in the expansion of existing mines and the building of new mines and natural gas facilities.
Now, the boom in prices ended more than a year ago and it seems the boom in mining investment is close to its peak. That is, the amount of money being spent on expanding our mining production capacity will stop growing each quarter and start declining.
Even so, we'll still be investing a lot more on mining each quarter than we usually do. So we're far from reaching the point where our mining production capacity stops expanding.
And that still leaves this play with a third act that's only just started: a huge increase in our production and export of minerals and energy as we take up the newly expanded capacity.
Thus you see why this "boom" is as much structural as cyclical. It represents a historic and lasting change in the industry structure of our economy, achieved over a relatively short period.
But just how big is mining after all this expansion? The miners' critics - particularly the Greens - make it seem the industry is pathetically small, whereas the industry itself tries to exaggerate its size and importance.
The Reserve Bank researchers adopt a wider definition of mining than that used by the Bureau of Statistics, partly because they're trying to get a more realistic estimate of the size of the part of the economy that's been the primary beneficiary of the boom and the size of the "fast lane" of the two-speed economy.
They establish the size of the "resource extraction sector", starting with the standard six components: coal, oil and gas, iron ore, non-ferrous metals, non-metallic minerals, and exploration and mining services.
But then they add those industries involved in smelting and refining the minerals before export - iron smelting, oil refining and liquefying of natural gas, and the refining of bauxite to form alumina and the smelting of other non-ferrous metals, including copper, lead and zinc - which the bureau class as part of manufacturing.
According to the researchers' estimates, in the eight years between 2003-04 and 2011-12, the resource extraction sector's share of nominal "gross value-added" (essentially, gross domestic product) grew from less than 7 per cent to 11.5 per cent. Of this 11.5 percentage points, the narrowly defined mining industry accounts for 9.75 points, with the processing and refining part of manufacturing accounting for 1.75 points.
Most of this growth is explained by the higher export prices being received. That's mainly because the strong growth in the volume of iron ore production to date has been offset by a fall in the production of some other minerals, particularly oil.
Next the researchers estimate the size of "resource-related activity". This includes the investment spending on expanding the future production of minerals, as well as the provision of "intermediate inputs" used in the present production of minerals.
"In other words," they say, "it captures activities that are directly connected to resource extraction, such as constructing mines and associated infrastructure, and transporting inputs to, and taking extracted resources away from, mines. It also captures some activities less obviously connected to resource extraction, such as engineering and other professional services (legal and accounting work, for example)."
Over the eight years to 2011-12, this resource-related activity has more than doubled as a share of GDP, from less than 3 per cent to 6.5 per cent. Within that 6.5 percentage points, business services account for 2.25 points, construction for 1.25 points, manufacturing for 1 point and transport for 0.75 points.
Note, this inclusion of the inputs provided to the mining industry isn't the same thing as the usual shonky attempts to put a figure on an industry's "multiplier effect". For one thing, it takes no account of the effect on other industries of the spending of income earned by mining employees or shareholders. For another, the researchers take care that the inclusion of inputs provided by other industries involves no double counting.
Put the resource extraction sector together with the resource-related activity and you find the size of the "resource economy" doubled to 18 per cent of GDP over the eight years to 2011-12.
According to the researchers' estimates, this 18 per cent of total production of goods and services includes well over 16 per cent of manufacturing's output, 16 per cent of construction activity and 15 per cent of transport activity.
Since 2004-05, this fast-lane "resource economy" has grown in real terms at an average rate of 7.5 per cent a year, whereas the rest of the economy has grown 2.25 per cent a year - a smaller gap than some imagine.
Because mining is so capital intensive, one way to denigrate it and minimise the significance of its expansion is to note that its share of total employment (as opposed to total production) is a mere 2.3 per cent. But according to the researchers' estimates, when you include minerals processing with mining proper, its share of total employment rises to 3.25 per cent. And when you add the more labour-intensive resource-related sector, it accounts for about 6.75 per cent of total employment, taking the share of the "resource economy" to just less than 10 per cent of total employment.
Don't let anyone tell you the resources boom is no big deal.