- By Region
Ask the man who runs Australia’s largest rail freight company if the country’s resources boom is over and you will receive a frank assessment.
“Back at our half-year results, we published a list of all the proposed bulk [coal] port upgrades on the east coast. If you added them up, they would have almost doubled existing tonnage,” recalls Lance Hockridge, chief executive of QR National. “We said at the time that it wasn’t going to happen and I think what we are seeing playing out is exactly that: a lot of the hubris, a lot of the heat, has gone out of the top end of the market.”
Mr Hockridge believes the slowdown will ultimately help the resource industry, which is battling soaring development costs and a strong Australian dollar. On top of that, its biggest customer, China, faces an uncertain outlook.
Others are less sure. Last week BHP Billiton, the world’s biggest mining company, shelved more than US$30bn of planned developments
in Australia, triggering questions over whether the decade-long bull-run in commodities had ended.
Twenty-four hours later as the price of iron ore, Australia’s biggest export, hit a three-year low of less than $100 a tonne, Martin Ferguson, the resources minister, declared the boom was “over”, comments he later sought to clarify – but not before they had stoked political debate in Canberra over Australia’s need for a new economic strategy.
The Chinese-led resources boom
has helped Australia become the fastest-growing economy in the developed world. The resource and resource-related sectors are expected to account for 15-20 per cent of the Australian economy over the next two years, according to the Treasury.
But weaker demand for coal, iron ore and natural gas could have far-reaching effects, reducing employment, incomes and economic growth if other projects are also shelved.
That would increase the pressure on the Reserve Bank of Australia to lower interest rates to help other parts of the economy – such as retail, tourism and education – pick up the slack and make a bigger contribution to growth as mining investment cools.
It also presents a tricky dilemma for the government, which has staked its reputation on returning the budget to surplus this year. Economists at Deutsche Bank estimate that lower terms of trade (the ratio of export prices to import prices) could take $A13bn ($13.5bn) from the budget bottom line in the 2012/13 financial year and leave a deficit of about 1.5 per cent of gross domestic product, unless it cuts spending or introduces unpopular new taxes.
“Behaving as if the investment pipeline has suddenly run dry is not only false, it’s irresponsible. It has the potential to damage consumer and business confidence,” Wayne Swan, Australia’s treasurer and deputy prime minister, said in his weekly economic note.
Indeed, the projects put on hold by BHP last week are dwarfed by the A$260bn in resource projects that Australia’s Bureau for Resource and Energy Economics says have already been approved by company boards and regulators.
For that reason, the RBA doesn’t expect the peak of the investment boom to happen for a year or two when it will reach around 9 per cent of GDP.
“After that the rate of resource investment is likely to decline, while the export shipments of the resources themselves will pick up,” Glenn Stevens, the RBA governor, told MPs on Friday. “But then we might expect that some other sectors that have been weak of late, like residential and non-residential construction, might start to pick up.”
Brian Redican, a senior economist at Macquarie Group in Sydney, says that view assumes there will be a “miraculous” switch from investment-led growth to a growth cycle led by exports and “others”.
“It is true that as the mining investment projects are completed, production will get going and exports will improve, and this will support GDP growth. But the number of people needed to operate a mine is much less than the number required to build it”, says Mr Redican.
“And so where will the replacement jobs come from? And what will be the net impact on household income? And will non-mining businesses have the confidence to expand operations if the mining investment boom is unwinding?” he asks.
One way the RBA could help smooth the transition and stimulate the non-mining parts of Australia’s $1.5tn economy, say bankers, is by cutting the official cash rate from 3.5 per cent to something closer to that of a peer such as Canada, where the rate is 1 per cent. This might also help weaken the Australian dollar, which remains stubbornly above parity with its US counterpart despite the weakening in commodity prices.
History suggests, however, that Australia’s latest resource boom is likely to end with a bang rather than a whimper.
Based on the recent decline in iron ore and thermal coal prices, Australia’s terms of trade could be 15 per cent lower year-on-year by the fourth quarter of 2012, says Adam Boyton, Deutsche Bank’s senior Australian economist.
“Over the past 50 years such declines in the terms of trade have been seen only five times: 1961, 1971, 1975, 1985 and 2009. In three out of those five instances the economy has entered recession,” he says, noting that Australia avoided recession in 2009 thanks to large fiscal stimulus.
“It does seem to us there is some complacency surrounding the prospect of a sizeable decline in the terms of trade,” says Mr Boyton.