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Maximum Impact – The Mining Boom

The mining boom may be good news for Australia’s economy, but it has created new challenges that will impact all Australians in future years.

Australia is indeed the lucky country when it comes to natural resources such as iron ore and coal, as these are exactly the resources that the huge populations of China and India need.

It will be Australian resources that fuel the factories of their rapidly expanding manufacturing industries, plus build bridges, roads, railways, skyscrapers and houses.  Steel production in China alone has risen from 15% of the global total at the start of the decade to nearly 50% today.

As China and India have demanded more and more resources, Australia has benefited through a mining boom that has already had a far-reaching impact on our economy.

It seems clear that looking into the future the Australian economy will rely on the mining sector more than ever before.  However, it may come as a surprise that the mining sector has not risen as a share of Australia’s economy over the past two decades, hovering around 7% of gross domestic product (GDP).

Fly in, fly out

Many Australians have already received both direct and indirect benefits from the growing resources sector.

Since 2004, when large mining and gas developments began cropping up, the mining sector has doubled its workforce.  New communities have been established in Western Australia and Queensland  where skilled workers temporarily live and work, often there for just a few weeks before returning home – the so-called ‘fly in, fly out’ culture.

The knock-on effect of the emergence of these satellite communities is a need for infrastructure and services to meet their needs.  Industries such as constructing and travel have particularly benefited.

The airline industry for one has evolved to service these communities, with Qantas recently announcing it would start to fly Melbourne-Port Hedland, Melbourne-Karratha, Sydney-Karratha, and increase its capacity on Sydney-Perth routes.  With the addition of new routes, coupled with a need for upgraded airport infrastructure, there is a strong demand for staff.

Dynamic Aussie dollar

Another indirect impact of the mining boom has been a strengthening Australian dollar, which has affected the whole country.

Through the increased demand for resources we have seen a rise in Australia’s terms-of-trade (the ratio of export prices to import prices).  With more global income flowing into Australia, our dollar has strengthened significantly.

The dollar’s increased buying power means consumers are reaping the rewards whenever they purchase imported goods.  From audio-visual equipment and clothes to offshore travel, Australian consumers are picking up a bargain or two.

The challenge of good fortune

While all this has been good news for Australia, the mining boom has also led to some new challenges.

Some traditional sectors of the Australian economy – particularly manufacturing and tourism – are suffering from the stronger Australian dollar.  The manufacturing sector has been declining in importance over recent decades as the higher Australian dollar makes exports more expensive, falling from 15% of GDP in 1975 to just under 9% at the end of 2009.

Difficulties in the tourism industry can be seen with many resorts in Queensland, for example, offering bargain deals to attract travellers both from Australia and offshore.

The same goes for the farming sector.  Farming industries like wool and wheat are now only a small proportion of Australia’s wealth.  In 1990 agriculture exports made up 16% of all exports, but that has since been surpassed by our resources industries.  Between 1990 and 2010, coal and iron ore have risen from 11% to 24% and 10% to 19% respectively as a share of exports.

Big Australia?

Another issue that will need further thought is the demand for more skilled workers, especially in mining and gas.  Experts in these fields can be hard to find, and this is one example of how the supply side of the Australian economy will have to be expanded, either through retraining of existing workers, more graduates or skilled migration.

Attention will also have to be paid to the potential downside of higher wages – greater demand for labour inevitably leads to demands for higher wages.  This has the potential to stir inflation and may ultimately push interest rates higher.

To avoid pressures on interest rates and inflation, Australia must lift the supply side of its economy beyond labour, in particular through infrastructure such as roads, high speed railways, advances in communications technology and ports.  Both the public and private sector will have to be involved in the funding of infrastructure development, with much of the improved infrastructure needed in capital cities.

Looking to the future

The rise of emerging economies such as the BRICs (Brazil, Russia, India and China) has shifted dynamics in the global economy as these previously agricultural nations continue to develop.

With a combined population of more than 2.8 billion, urbanisation in the BRIC nations cannot be underestimated.  As it accelerates, so will the demand for steel and other hard commodities such as iron ore, coal and copper.  Soft commodities, particularly protein in the form of meat and grain, will also be in high demand.

As demand increases, so should Australia’s wealth.  And as our wealth grows, we will have to find more skilled workers, build infrastructure to support our growing communities and address that tricky question – how can we receive our fair share of the wealth from the mining boom without biting the hand that feeds us?

The Federal Government has begun to consider this, with the proposed introduction of a mining tax on profits of iron ore and coal producers, as well as extending an existing tax on oil and gas profits.  How this extra money will be spent will be crucial.

The last decade has shown us that Australians deal extremely well with change.  It will be important for Australia that we address the new challenges that will flow from the mining boom in a positive way.

—–this article originally appeared in Colonial First State’s IQ magazine. November 2010.

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