2 Jul 2014
Mining exports boom as investment falls away
Exports from mining over the next three years will contribute 1 percentage point to Australia’s GDP growth – enough to provide a solid offset to the decline in mining investment many fear will drag back the economy.
The mining boom is moving into its third phase: production. The boom to date has been driven by surging demand for Australia’s commodities - particularly from China, where rapid urbanisation and industrialisation have substantially raised the consumption of steel making and energy producing commodities.
The first phase of the boom was characterised by sharply rising commodity prices, including iron ore and coal (the bulk commodities), which drove a sharp lift in Australia’s terms of trade. The second phase, the investment phase, saw an enormous expansion in production capacity of these commodities, as well as in LNG.
The third phase is just beginning. The extra capacity from the $450 billion investment boom will substantially boost the production and exports of Australia’s key commodities over the next three to five years.
Over the next three years, Australia’s export volumes will rise by around 6.5 per cent each year, driven mainly by bulk commodities. Resources exports will contribute approximately 1 percentage point to Australian GDP growth each year for the next three years.
At ANZ, we expect mining investment to fall 14 per cent in 2014, 22 per cent in 2015 and a further 22 per cent in 2016. This will subtract 1 percentage point in 2014, 1.25 percentage points in 2015 and 1 percentage point in 2016. Adjusting for lower imports, however, suggests the net impact will only be around half of this.
Mining investment, exports and non-mining
This phase will bring significant benefits to the Australian economy. Higher commodity export volumes will boost growth while increased export revenue will improve Australia’s external accounts. Notwithstanding high rates of foreign ownership, the lift in profits will flow through to the economy via higher dividend payments, higher company taxation and increased royalties.
Challenges will come, however, particularly in the form of declining mining-related employment.
The production/operational phase of the resources boom is less labour intensive than the (shorter) investment phase so the transition to the production phase of the mining boom from the investment phase will see employment in mining and mining-related jobs fall. As an example, the construction of a Western Australian iron ore mine requires two to three times as many workers on average as the operational stage of the mine. For LNG, the ratio is even higher. ANZ research estimates that employment in mining could fall by at most up to 75,000 by the end of 2016 as a result of the fall in investment. Moreover, fewer workers in resources activity will have an outsized effect on household income and spending, as these workers tend to be paid well above the average wage.
Resources investment and related employment
Although higher resource exports will provide a solid offset to the drag from mining investment, the non-mining economy will need to pick up substantially for overall growth to recover.
This is an edited excerpt from the ‘Phase III of Australia's mining boom’, The full article is available on ANZ Live.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.