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Australia and the Millennium Mining Boom
Keynote presentation to ANCRE 2012
18th September 2012
Professor Quentin Grafton
Executive Director/Chief Economist
Bureau of Resources and Energy Economics
bree.gov.au
Overview
I. Price Forecasting - Best and Worst of Times
II. Macroeconomic Outlook & Overview
III. Millennium Mining Boom
IV. Sustaining Australia’s Future
V. Closing Remarks
bree.gov.au
I. Price Forecasting - Best and Worst of Times
bree.gov.au
“Boom still on boil”
AFR 10/9/12
“Iron ore prices have
recovered some ground”
The Australian 12/9/12
“The mining boom will not go on forever”
BHP Billiton chairman Jacques Nasser
Adelaide Advertiser 13/9/12
bree.gov.au
Selected commodity prices: peaks & troughs
(nominal US dollars)
Copper
US$/t
Aluminium US$/t
Zinc
US$/t
Nickel
US$/t
Uranium
US$/lb
Copper:
Aluminium:
Zinc:
Nickel:
Uranium:
Source: BREE
Pre-GFC
Peak
8,985
3,292
4,620
54,200
136
GFC
Trough
2,770
1,254
1,042
8,810
42
Notes: prices are from the following dates
3-Jul-2008
24-Dec-2008 14-Feb-2011
11-Jul-2008
24-Feb-2009
28-Apr-2011
24-Nov-2006 12-Dec-2008 7-Jan-2010
16-May-2007 24-Oct-2008
21-Feb-2011
Jun-2007
Mar-2009
Jan-2011
Post GFC
Peak
10,148
2,772
2,635
29,030
73
Current
7,561
1,870
1,831
16,240
49
29-Aug-2012
29-Aug-2012
29-Aug-2012
29-Aug-2012
Aug-2012
bree.gov.au
Tianjin Iron Ore Spot Prices (CFR)
200
Peak : US$192
Peak: US$186
Trough: US$163
Peak: US$181
180
Peak: US$148
160
Trough: US$117
Trough
US$118
140
120
Peak: US$106
100
Trough: US$87
80
Trough: US$76
60
40
20
US$/t
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
62% Fe CFR Tianjin
Source: Bloomberg
bree.gov.au
Historical Iron Ore Prices
350
300
250
200
150
100
50
index
Jun-66=100
1966
Source: BREE
1971
1976
1981
1986
1991
1996
2001
2006
2011
bree.gov.au
Iron ore price & USD/AUD exchange rate
200
1.20
175
1.10
150
1.00
125
0.90
100
0.80
75
Correlation coefficient 0.74
US$/t
0.70
US$/A$
0.60
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12
iron ore spot price, 62% CFR China
Source: BREE
US$/A$ (right axis)
bree.gov.au
What if? Iron ore prices and exchange
rate
2012–13
Total R&E export earnings
Exchange rate assumption
Forecast iron ore price
Source: BREE
$189 b
Iron ore price
Change A$b
+/– 5%
+/– 10%
Exchange rate
Change A$b
+/– 5%
+/– 10%
2
4
–8
– 18
–2
–3
10
19
0.99 US$ / A$
104 US$/t
bree.gov.au
II. Macroeconomic Outlook & Overview
bree.gov.au
Economic Growth in Key Export Markets
Source: IMF; BREE
bree.gov.au
10 year bond yield spreads to Germany
Source: Bloomberg
bree.gov.au
Debt Cycles and the Burden on Central Banks
Source: Bank of International Settlements
bree.gov.au
Value of R & E exports: actual & forecast
Value of exports (A$m)
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
117,362
161,796
139,468
179,237
193,091
189,189
– energy
45,591
77,892
57,478
70,143
77,398
80,788
– metals and other minerals
71,771
83,903
81,990
109,094
115,693
108,401
Resources and energy
Source: BREE
bree.gov.au
Volumes, Prices & Values of Key Exports
Source: BREE
bree.gov.au
III. Millennium Boom
bree.gov.au
Australia’s Terms of Trade
Source: BREE; RBA
bree.gov.au
Australian Merchandise Exports to China
($2010-11)
70
60
50
40
30
20
10
A$b
1989–90
1992–93
1995–96
mi nera l res ources
Source: BREE
1998–99
2001–02
2004–05
2007–08
2010–11
mercha ndi s ed goods
bree.gov.au
Economic Variables: Before & During Boom
(1.00 = initial year)
Economic variable
Employment in Australia
Employment in mining sector
Unemployment rate
Average household income (a)
Nominal interest rate
Real interest rate
Source: BREE; ABS
Unit
Period average
1994-95 to 2002-03 2003-04 to 2011-12
index
1.06
1.10
index
0.96
1.53
%
7.4
5.0
index
1.09
1.16
%
5.6
5.1
%
5.0
4.5
bree.gov.au
Mean Weekly H-Hold Income ($2011-12)
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
Ratio of 201112 to 2002-03
Source: BREE; ABS
NSW
805
845
865
909
932
951
953
983
1011
1038
VIC QLD
752 698
781 731
800 772
821 807
832 856
853 877
874 936
923 986
964 1011
998 1037
SA
700
676
700
741
784
807
842
868
900
931
TAS
643
660
710
715
730
755
753
800
849
890
WA
NT ACT Australia
719 755 841
752
754 758 865
781
791 799 931
808
822 861 1007
842
892 887 1043
873
963 945 1039
900
1005 975 1097
926
1051 1026 1162
968
1101 1090 1241
1003
1192 1176 1308
1042
1.29
1.33
1.33
1.38
1.66
1.49
1.56
1.55
1.39
bree.gov.au
bree.gov.au
bree.gov.au
Value of Exports ($2011-12) and Mining
Employment
250
250
200
200
150
150
100
100
50
50
2011-12
A$b
'000
people
2002-03
2004-05
2006-07
employment in resources and energy (including services to mining) (right axis)
Source: BREE; ABS
2008-09
2010-11
total resources and energy export earnings
bree.gov.au
Commodity Prices (real): Past Trends &
Projections
800
700
600
500
400
300
200
100
index
2002-03=100
2002-03
2004-05
2006-07
iron ore
Source: BREE
2008-09
metallurgical coal
2010-11
2012-13
thermal coal
bree.gov.au
Australian Capital Expenditures in Mining
and Completed Major Mining Projects
($2011-12)
90
75
60
45
30
15
2011-12
A$b
2001-02
2003-04
2005-06
mining CAPEX
Source: BREE; ABS
2007-08
2009-10
2011-12
value of completed projects
bree.gov.au
Cumulative real value of completed
projects ($2011-12)
120
100
80
60
40
20
cumulative
2011-12$b
Apr-07
Source: BREE
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
bree.gov.au
Prospects: Value of advanced projects if NO
NEW projects were announced ($2011-12)
Source: BREE
bree.gov.au
Commodity Production: Past Trends
300
250
200
150
100
50
index
2002-03 = 100
2002-03
2005-06
iron Ore
Source: BREE
metallurgical coal
2008-09
LNG
2011-12
thermal coal
bree.gov.au
Bulk Commodities Exports
Source: BREE
bree.gov.au
Phases of the Millennium Boom
phase II & phase III
phase I
1500
500
1200
400
900
300
600
200
300
100
index
2002-03=100
capex
2011-12 A$b
Mt
2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
2014-15
2016-17
indicative figures only
iron ore export volumes
thermal coal export volumes
met coal export volumes
LNG export volumes
bulk commodity real price index (right axis)
value of advanced projects (capex, right axis)
Source: BREE; ABS
bree.gov.au
IV. Sustaining Australia’s Future
bree.gov.au
Nineties versus Noughties
Contributions to growth in average incomes by decade
(percentage points, annual average)
4
3
GNI
per person
]
2
Contributed 1.2% per year
growth in average incomes
1
Labour productivity
Terms of trade
Labour utilisation
Foreign income flows
0
-1
1990s
Source: Australian Treasury
2000s
bree.gov.au
Three Ps: 1992-2002 and 2002-2012
Population
12%
Income
16%
Participation
1%
3%
Terms of Trade
49%
46%
4%
86%
Productivity
18%
1992-2002
2002-2012
- 3%
Income: Real gross national income: Chain volume measures
Productivity: Multifactor productivity, quality hours adjusted hours worked
Source: BREE; ABS
bree.gov.au
Productivity Growth
Productivity growth is supported by public and private
sectors working together to:
(1) Avoid infrastructure bottlenecks;
(2) Ensure a tax system that rewards & supports productive
activities; and
(3) Skills & innovation framework for students and workers
and that encourages R&D and on-the-job innovation
bree.gov.au
Potential outcomes for income growth
Maintain
2011-12
Goldilocks
Terms of Trade
3.7%
Productivity
Agenda
Bears
‘Bad News’
Decline
Low
(2000s)
Source: BREE
Productivity Growth
High
(1990s)
bree.gov.au
V. Closing Remarks
(1) Millennium Boom has been unambiguously good for the
Australian economy with real income growth of about 40%
over the past decade.
(2) The ‘easy’ gains of ever increasing real prices is past.
Forecast declining terms of trade requires Australia to
substantially increase its productivity growth.
(3) Investment phase of the boom has not yet peaked. Past
and current mining investments could eventually lead to
tripling of Australia’s export volumes from start of
Millennium Boom to the 2020s.
bree.gov.au
Thank You
(quentin.grafton@bree.gov.au)
bree.gov.au
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