In his 2013 election campaign, Tony Abbott promised his government would build a world-class “five pillar economy”, encompassing manufacturing, agriculture, services, education and mining. Two years later, as his government prepares its second federal budget, just how are these sectors faring?
The prices of exported goods over the past year have stabilised or fallen, particularly for iron ore, oil and coal. Australia’s mining sector is also moving from the construction phase (which creates considerable employment) to the operation phase (which requires up to 10 times fewer workers). So it’s a good time to have a look at the mining sector in a more historic context and examine the outlook for the future.
Australia’s mining sector has been hailed as a saviour to the economy, protecting it from the effects of the severe economic downturns experienced in the USA, Europe and other countries during and after the global financial crisis of 2007-08.
There is no doubt that the minerals and energy boom of the 2000s was responsible for much of the growth in commodity export earnings. It also protected economic growth rates and, to some extent, jobs during this time. The mining boom was in large part due to the significant increase in demand for raw materials and energy by China and India during their very rapid economic growth over the past decade.
Mining and the economy
The mining sector currently contributes around 8.5% to Australia’s GDP (total output), and employs around 2% of the workforce (about 220,000 people).
However, as with most primary products, this underestimates the impact of the mining sector. Downstream processing sometimes means that production is not counted as mining output, and is instead counted as manufacturing.
The mining sector’s biggest impact is on exports – in recent years it has made up over 50% of Australia’s total export earnings. The effect of the mining boom on exports has been huge – for example, between 2000 and 2010, the value of exports from mining rose by over 120%, from $63 billion to $139 billion.
According to the Australian Bureau of Statistics and the Department of Industry and Science, earnings from minerals and energy exports reached $195 billion last year. The graph below shows that iron ore and coal dominate export earnings, followed by liquefied natural gas (LNG).
The development of mining has relied heavily on foreign investment, without which we would have a much smaller mining sector than we have today.
The ups and downs
At the federation of Australia in 1901, when primary industries were relatively more important, the mining sector contributed about 10% to total output, largely due to gold mining.
However mining’s production and significance fell over the next 50 years, and in the 1950s, demand for Australia’s minerals and energy was much, much lower, and the costs of production and transportation much higher.
In the 1960s, things began to change. The United Kingdom joined the European Union and traded less with Australia, so Australia began to look for new markets in Asia. Australia abolished post-World War II legislation that prohibited selling minerals to Japan (which was originally put in place for fear by some that iron ore might be used in weapons against Australia), and today Japan is Australia’s second-largest export destination after China.
From the 1980s onwards, growth in emerging Asian economies saw demand rise even further. On the supply side, larger, more efficient shipping lowered the costs of the transport of minerals, and new technology lowered mining extraction costs.
The following graph shows how significant the change over time has been in the value of mining exports to the Australian economy.
Short-term forecasts are that increases in supply by other countries, together with slowing demand, will see a fall in export earnings from mining over the next year or so. Also, as economic growth in China moderates, so will its demand for raw materials.
So, while the mining boom is over, and the industry moves into its operational phase and therefore employs fewer workers, the outlook seems generally good.
But as economists often say, that is assuming nothing else changes.