Viewpoint: Is Australia's resources boom over?
The past week has seen much debate in Australia about whether the mining boom that has supposedly propelled the economy for the past decade is over.
But is it really over? And would it really be the disaster for Australia that many fear?
In broad terms, the mining boom has three stages.
The first stage, or Mining Boom I, began early last decade and was accompanied by surging commodity prices.
Resource companies' profits surged as they employed more people. They paid more taxes, which led to huge budget surpluses and allowed annual tax cuts, so not only did the resources companies benefit, but there was a big trickle down effect to almost everyone else.
The second stage, or Mining Boom II, is what has been underway over the past couple of years.
This has been characterised by a surge in mining investment. This stage will take mining investment in Australia from around 4% of the gross domestic product (GDP) a couple of years ago to around 9% in 2013.
The third stage, or Mining Boom III, will presumably come when resource exports surge on the back of all that investment.Where are we now?
In terms of the commodity prices surge, it is likely that we have either seen the peak, or the best is over.
In terms of mining investment, while the cancellation or delay of Olympic Dam and other marginal projects indicates that projects under consideration has probably peaked, this does not mean that the mining investment boom is over”
First, the pattern for raw material prices over the past century has seen roughly a 10-year upswing followed by a 10 to 20-year secular bear market.
After a 12-year bull run since 2000 this pattern would suggest that the commodity price boom may be at, or near, its end.
At the same time, global growth also appears to have entered a constrained patch as excessive debt levels weigh on the US, Europe and Japan. Potential growth in China, India and Brazil also looks like being one or two percentage points lower than was the case before the global financial crisis.
Finally, the supply of raw materials is likely to surge in the decade ahead in response to the global resource investment boom, putting further pressure on prices.
In terms of mining investment, while the cancellation or delay of Olympic Dam mine expansion by BHP Billiton indicates that projects under consideration have probably peaked, this does not mean that the mining investment boom is over.
In fact, it probably has another one to two years to run. Based on active projects yet to be completed, there is a pipeline of around $270bn of work yet to be done, suggesting a peak around 2014.
While the boom in mining investment is not over, what can be said is that the end is coming into sight.
As for the Mining Boom III, the pick up in export volumes flowing from the surge in mining investment in iron ore, coal and liquid natural gas will start to get underway around 2014-15.A more balanced economy
Talk of the end of the mining boom has created a bit of nervousness regarding the outlook for Australia.
But, in reality, the inevitable end of the mining investment boom should hopefully see Australia return to a more balanced economy.
First, we are now seeing market forces kicking in to rationalise resource projects. This is a good thing as it will reduce cost pressures and reduce the size of the commodity supply surge ahead, helping avoid a crash in commodity prices.
Second, the cooling down of the mining investment boom should also help other sectors of the economy.
With roughly two percentage points of growth coming from mining investment alone, the sector has really put a squeeze on the rest of the economy.
Housing and non-residential construction, retailing, manufacturing and tourism have all suffered under the weight of higher-than-otherwise interest rates and a surge in the Australian dollar to 30-year highs.
What is more, the boom in mining investment has meant that the federal government has not seen the tax surge it got during the last decade, resulting in the need for continuing fiscal cutbacks.
This is all evident in the Australian stock market which has underperformed global shares since late 2009.
So the end of the mining investment boom in the next 18 months or so will take pressure off interest rates and the Australian dollar, and should enable the parts of the economy that have been under pressure for the last few years to rebound, leading to more balanced growth.
This is also likely to be augmented by a pick-up in exports of resources.
Of course a risk is that of a timing mismatch around 2014, as investment slows down and other sectors take a while to pick up.
To guard against this, the Reserve Bank will clearly need to be ready to lower interest rates.