LAUNCESTON, Australia: Have Australians got it wrong by bemoaning what’s been called the end of the commodities boom, which may turn out to be another bit of good fortune for the nation known as the lucky country?
The decision to cut capital spending by Fortescue Metals Group, probably the country’s most bullish iron ore miner, has been viewed as another nail, if not the final one, in the coffin of the once-in-a-generation resources extravaganza.
News that the economy expanded 3.7 percent in the year ended June 30 wasn’t enough to temper the feeling that Australia’s best days may be behind it, especially given the leverage of the economy to the now slowing Chinese giant.
But despite the lower growth profile for the coming quarters as China struggles to re-ignite its economy after a self-induced slowdown to combat inflation, Australians may just find they have dodged another economic bullet.
Australia’s uninterrupted 21 years of economic growth has seen the nation skirt around two global recessions, the first after the tech bubble burst in 2000 and the second after the 2008 financial crisis.
In the first instance it was Australia’s relative lack of a high-tech sector that meant it avoided the excesses of the dot-com era, and in the second, it was vast natural resources available when China and other nations embarked on spending sprees to stimulate their economies after the financial crisis.
It’s worth noting that in the 1990s Australia was often criticized by analysts for not going high-tech, the argument being that it would languish in the economic slow lane because it was an old economy reliant on resources.
That turned out to be Australia’s saving grace, as it was again in 2008.
However, this time commodities are being blamed for a possible end to Australia’s economic run, mainly because the economy has become dependent on investment in resources to drive growth.
BHP Billiton’s decision to shelve a $20-billion expansion of its Olympic Dam copper, uranium and gold mine in South Australia state, and delay other projects such as the expansion of its iron ore port in Western Australia, brought the commodity boom back into focus.
Of course, BHP’s dramatic announcement was sure to grab the headlines, but the truth is that all over Australia getting new projects off the ground was getting harder.
Opening up the Galilee coal basin in Queensland looks unlikely for a while as multi-billion dollar projects in the remote region struggle to raise finance amid uncertainty about just how much Chinese and Indian demand will rise.
The four liquefied natural gas projects using coal-seam gas as feedstock may also delay expansion plans beyond the initial plants due to come on line within the next few years.
This all sounds bad, so much so that even the resources minister said the boom was over, before being rebuked by his colleagues in Prime Minister Julia Gillard’s Labour Party-led minority government.
But there is a positive side to the current developments as well.
Firstly, the cancelation or delay of some mega-projects may have come early enough to avoid a nasty correction later.
Going back in history it seems pretty clear that economic bubbles end with over-investment and throwing money at decidedly high-risk projects in the belief that the boom will go on forever.
Trimming back capex now means that companies and their investors may have got a dose of economic reality before expanding supply far more rapidly than even growing Asian giants China and India can absorb.
The scaling back of the investment boom, which has seen upwards of $ 200 billion spent on resource projects in the past decade, may also allow other sectors of the economy to flourish.
Manufacturing and export-competing services such as education and tourism have suffered from the high Australian dollar, itself a result of the massive boost to the terms of trade resulting from the commodity boom.
A drop in the terms of trade, i.e. Australians receiving less for exports and paying more for imports, will help those industries, as will a lower Australian dollar, two processes that appear to be starting.
One of the mysteries so far this year has been how prices of iron ore and coal, Australia’s top two export earners, have plunged without the local currency slumping as well.
There is a strong correlation between spot iron ore prices in Asia and the Australian dollar, but that has broken down since iron ore peaked at $ 191.90 a ton in February last year.
Since then the steel-making ingredient has lost almost 55 percent to Tuesday’s $ 86.90, the lowest since October 2009.
However, the Australian dollar has gained 2.6 percent since iron ore’s peak, despite losing some ground in the last month to trade around $1.02.
When iron ore rallied 222 percent from November 2008 to its peak in February 2011, the Australian dollar surged 83 percent from October 2008 to its all-time high above $ 1.10 in July last year.
While there are a few good reasons for the Australian dollar’s resilience, such as the prospect of more quantitative easing in the US and Europe, history suggests that if commodity prices do stay subdued, the Aussie will decline, especially if the central bank keeps cutting interest rates.
The final reason that the end of the commodity boom may not be such a bad thing is that the boom probably isn’t over at all.
AMP Capital Chief Economist Shane Oliver splits the boom into three phases, the first being the jump in commodity prices last decade brought on by Chinese demand.
The second phase, namely the investment surge as producers sought to expand supply to feed China, has about two more years to run as projects currently being built are completed, according to Oliver.
And then comes the third phase when resource exports and revenues increase on the back of the investment in new projects.
To my mind the third phase may well be the sweetest of all.
Commodity producers should still enjoy strong prices, as nobody really expects China’s slowdown to last long, the Australian dollar should be at more competitive levels and the risk of Dutch disease, where one sector crowds the others out of the economy, should be diminished.
When author and social critic Donald Horne called his 1964 book “The Lucky Country” he didn’t really mean it as a compliment.
“Australia is a lucky country, run by second-rate people who share its luck,” was how he started the book’s last chapter.
To my mind his judgment may have been a touch harsh, unless by people he means politicians.
It’s true Australia does have a wealth of natural resources and is placed conveniently near the two most-populous nations on earth, both of which are urbanizing and industrialising.
But being able to leverage that natural wealth into one of the richest countries on earth takes more than luck, and it may just be that the current hand-wringing over the end of the investment phase of commodities boom is premature.
— Clyde Russell is a Reuters market analyst. The views expressed are his own.
End of commodity boom may be good for Australia
