The Mining Industry: From Bust to Boom Essay

Introduction

Australia’s mining industry registered a remarkable turnaround at the turn of the new millennium following high market demands in Asia’s emerging economies.

The resultant increased demand created a positive effect in Australia. This paper seeks to discuss how the turnaround specifically impacted on the Australian economy in terms of growth.

Global demand, supply, commodity prices

The period between 2003 and 2011 witnessed an increase of more than 300%, in US dollars, of global export resources from Australia after a sharp increase in demands from majorly the emerging economies.

Prices of other noteworthy steelmaking commodities from Australia also increased in the process. These developments followed closely on the heels of a poor performance in the same sector and industry that lasted for over two decades, between the 1980s and the early 2000s.

The Asian recession of early 2000, the collapse of the Soviet Union in the 1990s, and the poor run faced by Japan during the 1990s affected prices negatively, leading to the commodity prices stagnating.

In an attempt to mitigate on the harsh situation that was being faced by the industry, companies entered into mergers globally in order to achieve economies of scale advantages.

China’s emerging economy triggered huge demands for steel in 2003 given her humongous domestic market. The high demands have been sustained throughout the period, mainly due to the rate of urbanisation currently ongoing in the country.

Other economies in Asia have also indicated significant rise in demands, with India poised to also increase on its total market demands for steel over the next few years.

The Mining industry in Australia during the 2000s

Australia has a wide portfolio of minerals which it exports to the global market, including coal, iron ore, copper, as well as bauxite, and gold.

On average, Australia’s resource export value rose strongly in the 2000s to more than half the value of total exports registered at the close of the decade, mainly due to a 9% growth on the average of commodity prices.

Changes have also been witnessed within the structures of the mining industry where iron ore and coal now remain to be the minerals with most advantages to the country, unlike the 1990s when aluminium, gold, and copper emerged strongly as the most valued and profitable minerals for export.

The volume of processed metal exports contracted as their share grew less.

The effect of the mining boom experienced in 2000 saw the Company’s revenue rise from 6% of the total GDP to 14% by close of the first decade in the new millennium.

Mining investments currently stand at more than 4% of the GDP value, in comparison to 1.5% of GDP in the year 2000. Equally, Mining employment rose to 1.7% by close of the decade from a lower value of only 1% in 2000.

On the contrary, however, the total mining output has grown at a smaller rate of only 3%. This has consequently led to fallen labour and multifactor productivities as a result of the sharp rise in prices.

The fall in productivity is explained by depletion of reserves for such commodities as oil and copper which, as a result, occasioned a reduction in productivity. Basically, the mining companies were forced to extract lower grade resources while using more inputs.

Productivity also lowered because of the longer lead times between the time when investment in new capacity is undertaken, and the resultant output realised on stream.

This lead time is, on average, estimated to last for three years. With the current committed investment projects nearing completion, production of iron ore, coal, as well as LNG is set to increase significantly and consequently increase the exportation volumes, as well.

This will contribute to a recovery of the overall mining productivity in the long run.

The Mining boom and its effects on the economy

According to Heckscher-Ohlin-Samuelson framework, when global commodity prices increase, income and factor transfer effects occur. Income effect is a reflection of output changes of the different industries in the economy when spending export earnings of the higher commodity.

The incomes are spent mainly on paying taxes and royalties, including being shared out as dividend payment. The spending of these income values, rather than saving, results in an increase in other tradeables and non tradeables.

The transfer effect that follows an increase in prices of commodities is smaller, in the sense that more excess capacity in the form of labour and input markets results in smaller input amounts.

It becomes easy to import labour involved in the mining, together with the capital required rather than sourcing them domestically.

There is expected reduction in income effect whenever if foreigners have a greater share of the mining industry. When substitutability degree involving price is great, between consumption tradeables and non-tradeables, the rate of real exchange will be smaller.

A more flexible economy will result in smaller overall wage magnitude. The price as well as exchange rates will induce patterns of spending and inputs to an appropriate shift responding to the increase in domestic demand and mining production.

Direct effects to the economy

Mining operations have had a direct labour cost of about 10% of the total receipts in mining. The total increase in employment realised as a result of mining during the ten-year period is 2.2 million people.

The comparatively smaller increase in figures of employment in the mining industry is as a result of immense capital required.

Intermediate input expenditure has also increased to grow more than the direct labour costs incurred. This growth is equivalent to 40 percent of all the revenues from mining.

Among the goods and service costs that make up the intermediate input expenditure include freight, contractors, repairs, and rent charges, among many others.

A fast growth in the costs was experienced following the mining boom. The costs reached 15% per annum on average, which represents 3 percent of the decade’s GDP.

The Australian government has received large amounts of payments from the industry in the form of royalties and taxes. At the start of the decade, this amount represented a paltry 0.5% of the GDP.

In the period around the years 2008/2009, this same value had increased to about 2% of the GDP, marking the highest figure ever.

Taxes and royalties from oil and gas mining, however, have been falling in the entire decade. This is a reflection of Australia’s oil deposits and fields in general.

The industry’s gross operating surplus, after royalties and taxes have been deducted, has risen to about $65 billion registered in the recent years, up from a paltry $15 billion dollars recorded in the 1999/2000 period.

The new changes represent 5.2% of GDP compared to 2.2% of the GDP recorded in the 1999-2000 year period.

However, it is prudent to point out that the earnings of the mining industry do not impact significantly on the country’s economy. This is because the industry is largely foreign owned.

Spending within the Australian economy has been boosted as a result of the industry’s investment projects that have been initiated throughout the country. Total investments stood at $10 billion.

This was equivalent to 1.4 percent of GDP at the start of the decade. By the end of the decade, the figure was $58 billion. This figure represents 4.2 percent of the cumulative GDP.

The spending mainly comes in the form of payments to construction workers, as well as the purchase of non-labour inputs involved in the mining investment.

However, a larger share of the mining inputs is obtained from foreign countries rather than being sourced domestically.

Indirect effects to the economy

The strong market demand for minerals exceeded output of the same throughout the mining boom period. As a result, non-tradeables inflation also picked up to run at about an annual percentage value of 4%, which was up by a single percentage point recorded in the years prior to the boom.

Inflation in tradeables recorded an average percentage value of 1% each year thereby increasing real exchange rate measures to about a high of 35%.

Mining Boom Effects on the States

Some states, notably Queensland, Northern Territory, and Western Australia, enjoy more resource distribution than others with fewer or less distribution. The share of the distribution in resources is reflected in the different states economy structure.

Such aspects as employment, engineering construction, revenue, and value added industry gross are higher in states with more resources.

Comparisons with other mining booms in the past

The previous mining booms experienced in Australia were largely characterised by poor macroeconomic results and outcome. In particular, unemployment together and inflation were exceptionally high despite the boom.

On the contrary, the boon in the early 2000s has had a more stabilised macroeconomy mainly due to the institutional framework improvements following the adoption of floating exchange rate, product market flexibility, inflation-targeting regime, as well as decentralised wage bargaining (Eslake 2011, p. 223).

Conclusion

Australia has a combination of mineral deposits, which include oil, copper, iron ore, bauxite, and gold. These minerals are available in varied quantities, with oil volumes depleting tremendously over the years.

Decrease in global demand for these minerals in the period before the year 2000 had resulted in low prices and poor values. However, emerging economies in Asia, and particularly China increased demands in the early 2000s.

This fuelled a boom in Australia to supply the market. This has resulted in changes in the economy, including increased investment volumes, higher revenues, taxes, and royalty charges to the government, as well as increased employment.

However, the distribution of these resources in the country is not evenly as other states enjoy more deposits than others. This has resulted in a skewed growth and development pattern in the country, with states which have limited resources also experiencing limited development.

Although the country has experienced similar booms before, the current boom has managed to stabilise the macroeconomy, as opposed to previous ones which were characterised by high unemployment and inflation.

List of References

Eslake S 2011, “Productivity: The lost decade”, in H Gerard and J Kearns (eds), The Australian Economy in the 2000s, Proceedings of a Conference, Reserve Bank of Australia, Sydney, pp. 223–254