On the four drivers of Australia’s post-pandemic recovery, all but commodity prices are collapsing. Public spending, which has more than offset the losses from the Covid-19 recession, should be brought under control to consolidate public finances. Consumption, which has been driven by a combination of pent-up demand and excess savings during the shutdowns, is hurt by inflationary pressures and uncertainty.
Housing – both construction activity and the wealth effect of rising house prices encouraging spending – is now slowing due to the end of subsidies and rising interest rates .
This leaves Australia largely dependent on the remaining engine – commodity exports – for economic propulsion. Australia’s terms of trade (the ratio of export prices to import prices) hit record highs in the first quarter of 2022, benefiting from Chinese infrastructure spending and supply shortages. supplies created by the war in Ukraine.
But this reliance on commodities is unhealthy, for a number of reasons.
Commodity prices are volatile
In recent years, iron ore prices have fluctuated between US$40 and US$210 per ton; thermal coal prices between US$50 and US$410 per tonne; and natural gas prices between US$1.30 and US$14 per million metric British thermal units.
Overzealous demand projections, overinvestment, competition and politics create cycles of boom and bust. Economic activity and public finances are vulnerable; for example, a fall in iron prices of USD 10 per tonne decreases Western Australia’s royalties by around AUD 800 million per year and Australian tax revenue by around AUD 3.7 billion.
Commodities are finite and competition exists
Barring new discoveries, economic reserves at current production rates are approximately 55 years for iron ore, 120 years for coal and 44 years for liquefied natural gas. Given the energy transition and likely taxes or levies on carbon-intensive imports, Australia’s fossil fuel assets may never be fully exploitable.
Despite natural advantages, Australian exporters face competition from other producers. In the absence of national allegiances, global resource companies source products from alternative operations with lower cost structures, weaker environmental protections and less onerous regulations. Reliance on commodity exports also makes Australia dependent on major buyers such as China.
Economic benefits are overstated
Mining directly accounts for only about 250,000 jobs, or 2% of the total workforce. Most local jobs are during construction, although skills shortages and often remote locations mean foreign workers are used. The operation requires few workers due to high levels of mechanization and automation.
Imported capital goods are also needed to develop and operate the mines. For most of recent history, Australia’s external account has been in deficit, requiring foreign funds to finance the gap.
Australian resource companies are over 80% foreign-owned and most of their profits flow offshore. Significant write-offs, write-offs, capital cost allowances, and cross-border planning opportunities limit local tax revenues.
A dominant resource sector distorts the economy
This is known as the “Dutch disease”, when a focus on one sector leads to a decline in others. Mining monopolizes capital and workers, driving up costs and currency and undermining a country’s competitive position. A high Australian dollar disadvantages agricultural and service exports, encourages imports, discourages overseas tourists and makes it attractive for Australians to holiday abroad.
Resource dependence rarely features in political discourse. Instead, the uncertain future of fossil fuels has generated enthusiasm for raw materials needed for low-emission technologies, such as lithium, nickel and copper, as well as carbon-free fuels such as carbon dioxide. green hydrogen.
Change brings different problems.
Lithium production can be water-intensive, putting pressure on available supplies in Australia. The production of copper and nickel is energy-intensive and harmful to the environment when considering the entire production chain. Direct exports of renewable electricity via undersea cables or green hydrogen require technologies that are not yet economically viable.
More importantly, switching to new commodities, many of which are non-renewable, does not solve fundamental problems, trading one addiction for another.
Australia’s dependence on resources is compounded by Australia’s constant abuse of this revenue. It is channeled into consumption and tax cuts instead of savings, public goods, investments or a new industrial base.
Proceeds from booms could be saved to smooth out commodity price cycles or to invest in a post-mineral future. Options include a sovereign wealth fund or legislation, such as Chile’s Fiscal Responsibility Law, that prevents governments from spending temporary mining windfalls. The Australian Future Fund does not perform these functions, being designed to fund public sector pension liabilities.
Such ideas are unpopular with short-sighted governments keen to control commodity windfalls to advance political agendas, but future generations may curse their ancestors for the repeated failure to use the bounty of mining booms to secure economic prosperity. future of the country.