Australia's red hot commodities

In the hot, red dust of Australia’s outback there is a new gold rush going on these days, reports Janine Mace

Far from the sleek glass towers of Sydney and Melbourne, Australian mining companies are busy digging up and shipping off the country’s natural abundance of minerals to feed the insatiable appetite of China’s rapidly expanding industrial machine.

From iron ore to coal, zinc and gold, international demand for resources is underpinning one of the most dramatic mining booms in Australia’s history.

And it doesn’t seem likely to end any time soon. In March the Australian Government’s chief commodities forecaster, the Australian Bureau of Agricultural and Resource Economics (ABARE), predicted a 7% increase in total commodity exports which would reach a record A$134bn in the next financial year. This is on top of a 25% lift in the current year.

The bureau is estimating minerals and energy exports will reach A$100.6bn in 2006/07, reflecting increasing exports of iron ore and liquefied natural gas from Western Australia’s Northwest Shelf. Iron ore to feed Chinese steel mills is now expected to become Australia’s largest export commodity, with shipments rising by 26%.

The soaring international gold price, which some analysts are predicting will exceed its previous high of US$850 per ounce sometime in the next two years, is also having an impact. New gold mines are springing up all over regional Australia, with long abandoned works reopening as the rising prices once again make them an economic proposition.

And all this occurred before the Australian Government signed a major new agreement with the Chinese Premier, Wen Jiabao, in April, opening the door to the sale of Australian uranium to China in coming years.

Since Australia has 40% of the world’s known uranium deposits, local companies are now free to negotiate contracts to supply uranium to China to meet the goal of increasing its nuclear power generating capacity five-fold in the next 15 years. Under the terms of the deal, Australia will export 20,000 metric tons of uranium to China each year starting in 2010.

China now rivals the US as the world’s principal consumer of mineral resources. Figures show it bought over 20% of the global output of base metals in 2005.

ABARE executive director Brian Fisher says the bureau is expecting the annual value of Australian mineral exports to continue to rise.

“Over the medium term, export volumes are projected to increase almost across the board for mineral resources,” he says.

The resources boom has been reflected in the rise of the local stockmarket. The stellar performance of the Australian Stock Exchange’s Resources Sector over the past three years has seen the S&P/ASX 300 Resources Index increase by over 260%.

Prices have surged for companies such as BHP Billiton and Rio Tinto. At the beginning of 2004, shares in Australia’s biggest miner BHP Billiton were trading at A$12.19, and they are now almost A$30. Over the same period oil and gas explorer Woodside Petroleum’s shares have gone from A$14.80 to almost A$45.

These rises have cushioned the blow to the Australian economy from a deflating housing boom that saw local prices rise by 13.7% per year over the five years to 2003, higher than the 13.3% per year rise in the UK.

The house price spiral was only halted when the Reserve Bank of Australia moved to increase interest rates in 2004, and the market has been slowly deflating in the major capital cities ever since. Home building approvals are now down 34% from their peak in late 2002.

The resources bonanza has also helped prop up the economy after parts of Australia experienced the worst drought in a century, slashing key agricultural exports. Although the five-year drought is slowly receding, rural exports are still struggling.

Growth in other sectors of the economy has also been sagging and domestic consumption is down, making the resources windfall a handy cover for growing signs of economic softness.

Leading economic commentators are now starting to refer to Australia’s “two-track economy”. The resources boom is splitting the local economy in two, with strong prosperity in the western resource-rich states and stagnation in the industrial capitals of Sydney and Melbourne.

Access Economics director Chris Richardson says the commodity price boom has meant “different things for different parts of the economy. The housing boom was great for Sydney and Melbourne, but the commodity price boom is great for Western Australia and Queensland and the Northern Territory”.

Although unemployment in Australia is near 30-year lows, rates vary markedly. In outlying suburbs in the eastern states unemployment rates are rising, while resources industries based in the west are facing labour shortages.

The boom is driving significant internal migration within Australia. Thousands of jobseekers are flooding Australia’s resource-rich states, which are struggling to cope with the extra pressure of providing services and infrastructure for the new arrivals.

This is causing a mini housing boom of its own in many towns close to mining and resource production facilities. Figures from the Australian Bureau of Statistics show that while in 2005 house prices in Sydney declined by 3.9% compared with the previous year, prices in Darwin in the Northern Territory increased 23.2%, and prices in Perth in Western Australia rose 22.5%.

Tiny towns like Roxby Downs, located in the middle of the baking desert of northern South Australia, are the hottest real-estate markets in Australia. Because of its proximity to BHP Billiton’s copper and uranium mine at Olympic Dam, which is being assessed for a A$6.89bn expansion, housing at Roxby Downs is now sold within hours of listing.

It is a story being repeated through the resource-rich states such as Queensland and Western Australia.

Infrastructure

These states are now struggling to cope with the influx from other areas and are starting to look at options to pay for new infrastructure. For example, the Queensland Government has floated the idea of introducing a tax on interstate migrants to help raise A$1.5bn needed to fix the state’s ailing health system.

The Queensland Premier, Peter Beattie, told ABC Radio that people from interstate were “one of the reasons why there’s a lot of pressure on our health system, and it’s not unreasonable for… them to make a contribution”.

The pressure on infrastructure and services is fuelling an ongoing fight between state governments and the Australian Government over the carve-up of the A$39bn in revenue raised by Australia’s consumption or Goods and Services Tax (GST).

New South Wales (NSW), the state traditionally viewed as the major economic growth engine in Australia, has been feeling the pinch from its slower growth rate compared with that of the booming resource-rich states.

As the Australian Treasurer, Peter Costello, noted recently, NSW has “been lagging the growth rates of Australia generally and of other states, and the reason for that is that the correction, particularly in the housing market, has been stronger in NSW”.

The shift of money to the resource-rich states, and away from its traditional home in the eastern states, has left the other states with sagging economies and problems coping with stagnant growth and increasing infrastructure and service problems. This has resulted in the NSW Government engaging in a most unseemly slanging match with the Federal Government, including a A$400,000 full-page newspaper advertisement campaign, claiming the state is subsidising others, such as Queensland, through the carve-up of the GST revenue.

While the dollars may be flowing from the resource bounty being dug out of Australia’s red dust, the economic earthquake this wealth is causing is likely to create tremors for years to come.

Janine Mace is an Australian freelance finance and business journalist.