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Aus miners sustain economic boom

Jan 28 2013 11:51 Reuters
Mining

Mining (Shutterstock)

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Sydney - For all the doomsayers predicting an end to its mining boom, Australia is pumping out more metal, coal and gas thanks to an investment bonanza that will peak this year, boosting exports needed to extend a jaw-dropping 21-year run of economic growth.

Since the boom began back in 2007 miners have poured A$268bn ($282bn) into new projects, but long build times means actual output has lagged behind.

Now that's changing as the major miners break production records, with double-digit growth expected this year, and oil and gas fields come on stream, for sale to the rapidly growing Asian region.

The higher export volumes should help plug any hole left in the economy as the mining investment binge begins to wind down, having reached a point where it accounts for 8% of Australia's A$1.5 trillion economy, four times its long run average.

"The death of the mining boom has been greatly exaggerated, as the pick up in exports illustrates," said Paul Bloxham, an economist at HSBC in Sydney.
"And this is only the beginning of the export story. In the next few years, Australia is set to become a global energy player as LNG comes on stream."


Just in time?

Expanding by 3.1% in the year through September, Australia overtook Spain as the world's 12th largest economy, but it will need that ramp up in mining output and exports to come about quickly in order to avoid a nasty hiccup.

Given the scale of mining investments' contribution, even a modest pullback would take a chunk out of growth and even risk a technical recession in a country that was the only developed nation to dodge recession during the global financial crisis.

The need to offset that danger is a major reason investors reckon the Reserve Bank of Australia (RBA) will cut interest rates to record lows this year following four easings in 2012.

Yet recent production reports from the country's biggest miners do offer hope that exports are ramping up just in time.

BHP Billiton , Rio Tinto and Fortescue Metals all dug up record amounts of iron ore both for last quarter and for the whole of 2012.

Fortunately, Chinese demand proved healthy enough to swallow much of this output even as prices rose. Shipments of iron ore to China from Australia's busy Port Hedland climbed by a quarter in December alone, from the previous month, to be up over 21% on the year.

Production from Australia's main iron ore region of Pilbara is now predicted to rise around 17% in 2013, all of which will go to export.
 
The steel-making mineral already accounts for a fifth of the country's exports, bringing in over A$60bn ($63bn) a year. A decade ago it was worth just A$15bn.

Likewise, coal output is forecast to expand around 10% this year, while shipments of oil and liquefied natural gas (LNG) are starting to take off, with much more to come.

Woodside Petroleum Ltd this month boasted a 46% jump in fourth-quarter production, courtesy of a strong performance at its flagship Pluto LNG project.
The country's number two energy firm, Santos Ltd, reported a 13% rise in its output, lifting the quarter's revenue to a record $876m.

Australia has high hopes for LNG as A$190bn-worth of projects are underway with most of the gas already sold on long-term contracts. The government's official forecaster predicts LNG export volumes will rise 26% this year, and quintuple by 2020, making it as valuable an earner as iron ore is now.

"LNG will be the game changer," says Brian Redican, a senior economist at Macquarie in Sydney. "It will be a truly extraordinary boon and a great tailwind for the economy."

It is figures like this that gave Australian Treasurer Wayne Swan the confidence to call reports of the demise of the mining boom utter "claptrap".

"We know that the upswing in actual mining production, output and export volumes is still ramping up and that this will be a driver of Australia's economic growth in future years," Swan told a Harvard Club luncheon in New York this week.

Turn up the volume

An increase in output is long overdue. While earnings from all of Australia's exports have risen by an average of 7.4 percent a year since 2006, volumes grew at less than 3%.

In contrast import volumes have been running at twice that pace, in part because miners have been shopping for everything from remote controlled trucks to LNG platforms.

That matters as it's volumes that count when measuring real, or inflation-adjusted, gross domestic product (GDP). 

As a result net export volumes have subtracted from GDP for no less than 20 of the last 27 quarters, even though the value of those exports exploded.
That cycle should turn positive in coming years as shipments expand and miners need to import less equipment as projects are finished.

Michael Blythe, chief economist at Commonwealth Bank, estimates the mining capital stock rose by 13% in 2010/11 and a further 21% in 2011/12. 

"Expansion at this pace is consistent with double-digit growth in resource exports. A 10% rise in resource export volumes would add one percentage point to annual GDP growth."

That also promises to be fillip for Australian productivity, which has been no better than pedestrain in recent years.

Productivity in the mining sector has been particularly lamentable, partly because the huge windfall from higher commodity prices removed much of the need for discipline.

More tellingly the huge lead times on mining meant it is often years before output increases. The massive $52bn Gorgon LNG project, for one, began at the end of 2009 but will not produce a drop until late 2014.

Given productivity measures output per unit of labour and capital employed, spending billions for no output is a sure way to look unproductive, at least statistically.

Again, that should change markedly for the better when the projects come on stream. And the improvement to labour productivity should be all the greater as it takes 15 to 20 times more workers to build an LNG plant than to operate it.

 

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austrailia  |  mining industry
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