The 'end of Australia's mining boom' is one of the most anticipated developments in geo-economics. The writing has been on the wall for a while: in the next few years China's metal consumption will peak and then decline, and all the while Australian mines have expanded aggressively. There will not be another customer to replace China. It may all end badly.
The jeremiads have a tone of schadenfreude, as the 'Lucky Country' finally gets its comeuppance. Amid the countless commentaries (The Carnival is Over, End of the Boom, A Hard Landing Downunder, etc) is a serious assertion that Australians have wasted the golden years, spending on McMansions, overseas vacations, gold-plated barbeque grilles and BMWs. Bradley Jones, an Australian economics whiz at the IMF, penned a harsh internal note called Australia's Brewing Crisis of Complacency, invoking Lee Kwan Yew's warning about becoming 'the poor white trash of Asia.' When boom turns to bust, Jones asks, 'will the ruling political class rise to the occasion?'
John Edwards has penned a nifty little book for the Lowy Institute's Penguin Specials series tackling these fears head-on. In Beyond the Boom, Professor Edwards acknowledges the long history of 'the black armband view' of Australian economics.
'Australia's economic problem is a ninety-year-old problem…a legacy of relative economic decline throughout the century' wrote Paul Kelly in 1992, just as Australia's present mining boom started roaring into life. Admittedly with the benefit of a quarter-century's prosperity behind him, Edwards thinks such pessimism was, and still is, way overdone. It turned out that Australia was not Argentina, which seems the more apt target of Kelly's appraisal. But was Australia really just lucky because it happened to be a dominant and proximate supplier to the needs of China's own voracious expansion? Or was there more to Australia's success, qualities that will support the nation well after the current economic cycle subsides?
Edwards argues that Australia made its own luck. It has undertaken extensive reforms, notably in federal and state financing and promoting pension investment. It has solid government, healthcare, and education. Some of its companies are world-class. Australia performed the amazing feat of settling two million long-term immigrants, adding 10% to its population, in the last decade, a testament to the quality of its institutions and its infrastructure. Defying the caricature of beaching slackers, Australians work hard and save even harder (at least by Anglo-Saxon standards). Australians are not feckless or profligate, but 'even frugal.' That they have socked away private savings during the boom years suggests commonsense and (something which I think is overlooked) a deep unease about the future. Far from being complacent, they realise their good fortune (and the price of their houses) may one day come crashing down.
They are right to be worried. By Edwards' calculation, the total resource economy (including all related activities) is 18% of GDP, large indeed. As for the incremental contribution of mining to GDP, Edwards calculates three percentage points over eight years; consistent with most estimates of about 0.5% annually. However, gross mining investment alone (ie. capital expenditure in new mining assets) is a whopping 7% of GDP (historically it has been 1-2% at most) and now is set to plunge. Mining companies are slashing capital expenditure and that will hurt.
But Edwards notes something very odd about the Australian mining industry. The boom, as he says, has been a quiet one, confined mainly to Western Australia. Mining employs relatively few workers. Much of the capital equipment is imported — not a 'good' thing, but it does mean that the capital expenditure downswing will mainly be borne by foreigners. And foreigners own fully 80% of the major mining companies. Edwards calculates that for every $100 in mining value added, fully 48c end up in the pockets of overseas shareholders. Edwards also reckons much of the long boom in mining income has been because of commodity price rises rather than volume increases. Australia's export prices have risen as the 'China price' for imported goods has kept deflating. Although such 'terms of trade' gains are debatable and difficult to calculate, they imply the real economy should be buffered in a mining downturn.
Still, there's no denying 'the crucial requirement for sustained prosperity will be higher exports of non-mining goods and services.' The mining boom could evaporate much faster than expected. China may hit peak steel soon, just as Australian miners ramp up massive new iron ore capacity, forcing prices down. The global price of coal has almost halved since 2011. Even LNG, touted as Australia's next big resource export category, looks vulnerable to piped gas competition from Russia, Central Asia and possibly North American LNG. Worse, Australian costs have spiraled out of control by project over-runs, outrageous wages and cushy labour practices.
That, in my opinion, is the killer argument for why the boom will end and, indeed, why it must end: quite simply Western Australia has become hopelessly uncompetitive. Fortunately, the rest of the country is much better placed to serve the world with education, financial and healthcare services, agriculture, specialty manufacturing and tourism. Resources have been and will continue to be highly lucrative, and Australia has the institutions to spread the wealth widely. The nation pocketed the mining boom, but it must again be ready to adapt when it ends.
Photo by Flickr user Eugene Regis.