Lew's grave mining boom warning

A new study from the Australia Institute backs up Solomon Lew's claims that the Reserve Bank is mishandling the mining boom, and argues that one non-mining job could be lost for every two mining jobs created.

Last week marked an interesting evolution in the public debate on the Australian mining boom. After months of political jostling, the Senate finally passed the mineral resources rent tax, which will apply a 30 per cent tax on iron ore and coal.

This also coincided with the release of new research from the Australia Institute putting into perspective the upside and potential flip-side of the boom by highlighting some 'counter-intuitive' negative impacts on productivity and employment. The report reveals modelling for a mining project in Queensland has shown that under generous assumptions one non-mining job will be destroyed for every two mining jobs created.

Those findings were serendipitously echoed by former Reserve Bank board member Solomon Lew who declared that he believes "the central bank is mishandling the boom by maintaining high interest rates to protect the mining sector to the detriment of the non-mining sector, particularly retail".

These recent developments are particularly interesting because, apart from social and environmental issues or regular calls for the mining sector to share the profits, the systemic economic risks emanating from the boom have never really been on top of the public agenda.

On the upside, it is undeniable that investors and industries have gained from the boom, which has boosted the national economy.

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Source: ASX

Putting aside the details of the mining sector's balance sheets, the All Ordinaries Index shows how investors on the Australian sharemarket have been large beneficiaries from the boom during two notable 'bull rallies', marked in the chart above, in 2003-08 and 2009. These have been partly driven by the gains of resources companies.

In its May 2011 Investor Update newsletter, the ASX highlighted the examples of coal explorer Bathurst Resources, which saw its shares rise by 747 per cent in 2011. Rare earths explorer Lynas Corporation quadrupled shareholders’ money in just 12 months. Almost 90 per cent of IPOs made in 2010-11 were resource-related and the top performers gave shareholders well over 500 per cent returns. In fact, the entire materials sector outperformed the sharemarket by returning 10.99 per cent vs minus 0.77 per cent for the S&P/ASX 200 in the year to March 31, 2011.


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Source: RBA

If the boom has been good to investors via the performance of their shares, it has been even better to the profits of the businesses operating in the sector. In a nutshell this is due to the growth of Australian resources exports on the back of developing China and India. A multiplying effect was generated by the explosion of the price of minerals which our trading partners have been willing to pay. A tonne of coal traded at $20 in 2000; it reached $180 in 2008. This has enabled mining companies to generate exceptional profit margins compared to the other industries: 37 per cent vs 11.2 per cent for the Australian average.


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Source: RBA

As a consequence of this success, the share of the mining sector in the Australian GDP has increased during the boom, serendipitously echoing, albeit in a much smaller fashion, the mining rush of the 19th century that marked the foundation of modern Australia as it was preparing to enter Federation. However it is precisely when we start to look at those macroeconomic indicators that the story of the boom becomes more nuanced. Indeed, the Reserve Bank numbers also reveal that the share of employment has remained flat. This is a sign of worry for some analysts, as contribution to employment is a key measure of prosperity since, in the end, the aim of economic success is to 'give people a job'.

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Source: ABS

Even more compelling is the comparison of the share of GDP and share of employment between industries, which shows a clear imbalance in favour of the former in the mining sector: in other words, although mining generates wealth (9.2 per cent of GDP), it comparatively does not create that many jobs (1.9 per cent of people work in mining).

Interestingly, a survey conducted by Essential Media in September 2011 showed another type of imbalance in the public's perception: it showed that the average Australian thinks that 16 per cent of Australian jobs are in the mining industry and that 34 per cent of GDP comes from mining.

It is precisely because of this discrepancy in our collective perception and understanding of the boom, which we consider so vital to our national economy, that the research conducted by The Australia Institute is particularly important.

The study joins the dots between the mining boom and the high exchange rate of the Australian dollar, which is putting negative pressure on our economy. It is the exports of minerals, combined with capital inflow associated with building new mines, that has contributed to the upward pressure on the Australian dollar exchange rate, which is in turn negatively affecting other non-mining sectors by making their exports less competitive, and also favouring the offshoring of their workforce.

Secondly, the study highlights that we have reached a tipping point. So far Australia has been enjoying revenues and returns coming from the higher price of minerals extracted within the current infrastructure capacity.

However this infrastructure is now too stretched and requires a spur of developments that come at a cost. This is the shift: this cost is biting back because of the significant level of construction and skills ramp-up that is required, and currently lacking. This is putting pressure on wages, as anecdotally attested by the 'average' wage of the job offers on display at mycareer.com.au, which is reaching $156,341 for 'mining, oil and gas' (compared with $102,537 for the equivalent measure across all sectors).

Thirdly, the Reserve Bank has been using high interest rates to reduce the level of economic activity to "make room” for the mining boom, at the expense of other sectors. For instance in construction, high rates have maintained pressure on mortgages, have tamed employment growth and therefore freed up workforce for mining. It is this point that former Reserve Bank board member Solomon Lew made when he complained about the mishandling of the boom by the RBA.

A counter-intuitive perverse effect of these mechanisms is a decline in productivity, which is mainly explained by the fact that 'high commodity prices are encouraging mining companies to pursue less and less productive mine sites'.

Whilst productivity is a macroecomic measure particularly cherished by commentators, it is on the more practical consequence on employment that the institute's study provides fresh insights. Using the China First mine located in the Galilee Basin in Queensland as a proxy, their model indicates that it is possible that the boom might end up destroying more jobs than it creates. Indeed, workers leaving jobs in retail, manufacturing or tourism to join mining, have been causing a ratio of "one non-mining job lost for two mining jobs created”.

Just considering the 39 projects currently registered in Queensland, 20,000 jobs are set to disappear from the non-mining sector, whilst 40,000 jobs are expected to be created in mining. This means that 20,000 'invisible' workers will need to enter the workforce to deliver the forecasted net gain of 20,000. The research shows that if the skills shortage, which has been an ongoing problem in Australia, and upward pressure on exchange rates kick in, there is a real risk that we might end up with "one non-mining job lost for one mining job created": i.e. a zero gain or even worse, a net loss of jobs. Besides, "those new jobs are likely to be mainly short-term construction jobs, replacing longer term jobs in manufacturing, tourism and agriculture.”


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Source: Australia Institute

The Australia Institute's study presents data and evidence supporting those cautioning against putting all our eggs into the mining basket. And we are not just talking about activists traditionally circumspect about this industry, but policymakers and business leaders who have been calling for a national strategy to ensure Australia does not become just a mining country.

Xavier Rizos researches relationships between economics, governance, regulation, politics and culture.

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