Australian economy: From mining boom to bust?

in Money by Anthony Fensom
(145 Ratings)
mining boom

Australia's resource sector may be a victim of its own success, with spiralling costs and a strong currency making it the world's most expensive place to mine. Is the boom over? How might it affect the rest of the economy?


"After an upturn lasting a decade, the commodity super-cycle's end is at hand," UBS analyst Mark Rider told the Sydney Morning Herald in a December 12, 2012 report, citing China's slowdown and debt issues in developed economies. According to Rider, the peak in commodities prices had passed, with the downswing set to last as long as two decades.


Rider's gloomy prognosis followed a slump in prices of key Australian commodity exports, coal and iron ore. Lower Chinese steel production in 2012 saw coal prices fall by a third, resulting in mine closures and job cuts in Australia. Meanwhile, the iron ore price slumped to as low as US$86 a tonne after having hit US$200 a tonne a year earlier.


The downturn flowed on to other sectors of the economy, with contractors forced to shed staff and sales of everything from waterfront property to motorbikes dropping as discretionary spending dived.


Recovery underway?


Fast-forward to 2013, however, and the picture is looking rosier on the back of recovery signs in the US and Chinese economies. H3er US jobs and housing markets along with the aversion of the threatened "fiscal cliff" have helped US stocks hit five-year highs, while China is expected to achieve 8 per cent growth in 2013 after a weak 2012.


Japan's new government has primed the pumps to drag the world's third-biggest economy out of recession, while the eurozone is expected to start a recovery in the second half of 2013.


Already, commodity prices have rebounded with the iron ore price reaching US$158 a tonne. With iron ore exports worth $63 billion to Australia in fiscal 20121, such a price could see Australia's GDP expand by up to 6 per cent this year, according to Deutsche Bank economist Adam Boyton.


Tony Fawdon, executive chairman of minerals explorer Diatreme Resources, is confident that the mining boom is far from finished.


"I was in China recently and Beijing saw the biggest development I've ever seen - probably around 50 high rises going up on the road from the airport to the city, enough to house half a million people, while down another road I saw accommodation being built for 200,000, and that was just two roads," he says. "The world is wrapped up with what's going on in Europe and America, but China hasn't slowed at all. Although China has to sell to those markets, it probably has enough internal savings to run its economy for a few years, continuing to build internally, which of course helps Australia."


Dominic Kazlauskas, director of corporate finance at resources broker Patersons, is also a mining true believer.


"Resources have underperformed [in 2012], but over time they will outperform the rest of the market given the way that society consumes our commodities," he told the Queensland Exploration Council in a recent presentation. "Things need to work themselves out in the eurozone before things really start moving. China dominates global resources demand, but India is basically the same size and they all want their mobile phones, air conditioners and cars and that's not going to stop."


Kazlauskas said financial issues in Europe and the United States had weighed on the sector, noting that the International Monetary Fund had trimmed its global growth forecast to 3.6 percent for 2013.


Emerging economies, however, are expected to average 5.3 percent growth over the same period, with China "continuing to grow above the world average".


"Is the resources boom over?" he said. "No... but I'm a believer in longer cycles and the super-cycle, particularly with India and China continuing [to grow] and representing half the world's population, and that's not going to end anytime soon."


However, Diatreme's Fawdon warned that a slowdown in the mining sector would hit hard, given the weak retail, housing, tourism and manufacturing sectors.


"If mining slows, the Australian economy would suffer extremely badly. The only thing keeping us going is mining, some agriculture, niche manufacturing and perhaps education."


Sources:

1http://www.afr.com/p/opinion/much_depends_on_iron_ore_price_uFDFV6vksjiVewP8NB1wkJ

http://www.bloomberg.com/news/2012-12-12/australia-raises-2013-iron-ore-price-outlook-on-china-demand.html

http://www.smh.com.au/business/markets/us-stocks-hit-5year-high-on-strong-data-20130118-2cx0b.html

http://www.smh.com.au/money/investing/supercycle-moderates-20121211-2b6os.html


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This article represents the views of the author only and not those of American Express.



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Anthony Fensom

Anthony is a communication consultant at BWH Communication and a freelance writer with 15 years' experience in the stockbroking and media industries of Australia and Asia. He is a regular writer on business and other issues for publications in Australia and Japan. He consults on communication strategy to businesses ranging from private enterprises to professional service firms and publicly listed companies, with a particular interest in entrepreneurship in all its forms.

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