There is a lot of commentary in Australia arguing the end of the mining boom, and just what that might mean for the “lucky country.” Where once Australia rode on the sheep’s back, it has been trucks of iron ore that have carried Australia through much of its 20 year period of continuous growth, even despite the GFC.
So where do we sit at the moment? Certainly, commodity prices are under pressure as Chinese growth moderates. The focus in China is turning from investment led growth to consumption led growth. This has implications for Australia because a focus on consumption over investment means less infrastructure construction, resulting in less need for steel, and so lower demand for iron ore and other commodities. At the same time, major miners in Australia and overseas have in place large expansion plans to produce ever more amounts of iron ore, on the assumption that Chinese demand will continue to accelerate long into the future. Greater supply and lower demand does not bode well for medium term commodity prices.
This is important for Australia, because the expected gains from the mining sector underpin much of the federal government’s anticipated budget surplus in 2013. With the current government marrying its economic credentials to a surplus, there is the political risk that fiscal policies could be tightened dramatically, crunching expenditure at a time when the rest of the economy is slowing. The deferral of capital expenditure spending by some miners in recent weeks also undermines the view that a $100bn pipeline of mining projects will underpin employment and growth over the next 5 years. If these projects are pulled or delayed indefinitely, then the current 2-speed economy will quickly shift down to the subdued growth that we are already seeing in the non-mining states of Victoria and New South Wales.
This is a fragile moment for the Australian economy. If the one real growth leg for the country was to weaken considerably, there is no obvious sector that could pick up the slack at present. Construction is weak, manufacturing continues to contract, consumer confidence remains soft and house prices are far from robust. There is one saving grace. The RBA has significant room to move in cutting rates if need be. This would help lower the Aussie dollar, which would alleviate pressure on much of the manufacturing sector. Lower rates could prop up consumer confidence and cushion any fall in employment. This might be enough to offset some of the weakness that would flow from the end of the boom.
Marc Whittaker
Portfolio Manager