The past week has brought much debate and consternation in Australia as to whether the mining boom that has supposedly propelled the economy for the last decade is over.
This followed the cancellation or delay of various resource investment projects, including the massive Olympic Dam expansion and a fall in commodity prices over the last year.
But is it really over? And would it really be the disaster for Australia that many fear? After all, we have had years of hearing about the two-speed economy where the less resource-rich south-eastern states were being left behind, and it was said that the people of western Sydney were paying the price (via higher than otherwise interest rates and job losses) for the boom in Western Australia, so many Australians might be forgiven for thinking good riddance.
Semantics and confusion
Much of the debate about whether the mining boom is over has been characterised by confusion as to what is being referred to, with some focusing on commodity prices, others on mining investment projects and others saying that technically it hasn’t even begun until mining and energy exports pick up. In broad terms the mining boom that has gripped Australia for the last decade likely has three stages.
The first stage or Mining Boom I (MB I) began last decade and brought surging resource commodity prices driven by industrialisation in China. This resulted in a rise in Australia’s terms of trade to near record levels (see next chart). This phase was initially good for Australia last decade as it seemingly benefited everyone. Resource companies got paid more for what they produced. Their profits surged. They employed more people. They paid more taxes, which led to budget surpluses and allowed annual tax cuts. They paid more dividends and their share prices went up. The $A rose but not to levels that caused huge problems for the rest of the economy. So not only did the resources companies benefit, but there was a big trickle-down effect to almost everyone else. As a result the economy performed very strongly and unemployment fell below 4%.
The second stage, or Mining Boom II, has been characterised by a surge in mining and energy investment. This has been underway for the last few years and will take mining investment from around 4% of GDP in 2010 up to around 9% in 2013, contributing around 2 percentage points to GDP growth in each of 2011-12 and 2012-13.
The third stage, or MB III, will presumably come when resource exports surge on the back of all the investment.
So where are we now?
In terms of the commodity price surge that characterised MB I it’s likely that we have either seen the peak or the best is over with more constrained gains ahead:
- Firstly, the pattern for raw material prices over the past century or so has seen roughly a 10-year secular or long-term upswing followed by a 10- to 20-year secular bear market, which can sometimes just be a move to the side.
The upswing is normally driven by a surge in global demand for commodities after a period of mining underinvestment. The downswings come when the pace of demand slows but the supply of commodities picks up in lagged response to the price upswing. After a 12 year bull run since 2000 this pattern would suggest that the commodity price boom may be at or near its end.
- Global growth appears to have entered a constrained patch as excessive debt levels in the US, Europe and Japan constrain growth and potential growth in China, India and Brazil looks like being 1 or 2 percentage points lower than was the case before the GFC. This means slower growth in commodity demand going forward.
- The supply of raw materials is likely to surge in the decade ahead in response to increased investment.
- Finally, the surge in commodity prices since 2000 was given a lift by a downtrend in the US dollar from 2002 as commodity prices are mostly priced in US dollars. This has now likely largely run its course.
Taken together, this would suggest that the best of the commodity price surge since 2000, or MB I, is behind us. There are two qualifications though. First, after the recent short-term cyclical slump there will still be a rebound, probably into next year as global growth picks up a bit.
Second, it’s way too premature to say that the surge in demand in the emerging world is over, China and India are still very poor countries with per capita income of just $US8,400 and $US3,700 respectively, compared with $US40,000 in Australia, suggesting plenty of catch-up potential ahead and related commodity demand.