The Experience of Australia and Kazakhstan in the Mineral Price Boom of
2006-2014.
Ian Manning
Deputy Director, National Institute of Economic and Industry Research, Australia
Abstract
Both Australia and Kazakhstan are large in physical area but relatively small in population. Both have
extensive mineral deposits complemented by relatively fragile manufacturing sectors. Thanks to high
prices for energy minerals and iron ore, the terms of trade of both countries were highly favourable
from 2006 to 2014. Australia is well endowed with coal, iron ore and natural gas, all of which fetched
high prices during the boom years; Kazakhstan has a similar endowment with the addition of oil. In
Australia, the central and state governments have surrendered control over national investment
strategy to the private sector and are also, with the exception of the petroleum sector, have foregone
the capacity to exact additional revenue from the mining sector during times of high mineral prices.
From 2009 high profitability in the sector triggered considerable investment in capacity expansion.
Australia’s exchange rate is market-determined and followed the terms of trade, in the short term
facilitating mining investment but in the long-term exacting a high cost: its manufacturing and other
non-mining trade-exposed industries suffered loss of competitiveness, with a resulting lack of
investment and industry closures. The Australian banks also borrowed overseas, and now that the
boom has ended the Australian banking system finds itself with high levels of short-term overseas
borrowing and very low levels of foreign exchange reserves. By contrast, Kazakhstan’s marketoriented reforms over the past three decades did not surrender broad state control of the pattern of
investment. Its government responded to the high mineral prices by concentrating on the oil industry,
using negotiated agreements to finance developmental investment and build up an Oil Fund. This
allowed control of the exchange rate to give its manufacturing industries the opportunity to upgrade
their competitiveness. Royalties on other minerals were maintained at rates which discouraged
exploration. The author is much more familiar with the Australian history than with that in
Kazakhstan (the two countries are seldom compared) and will seek views as to whether his
interpretation of Kazakhstani history is correct. The initial conclusion is that Kazakhstan managed the
mineral price boom much more effectively than Australia.
Biography
Ian Manning is Deputy Director of the National Institute of Economic and Industry Research, a
private sector organisation based in Melbourne. Though he has taught in India, worked on
macroeconomic strategy for the new government of South Africa in the mid-1990s and conducted
investment appraisals for projects in a number of Asian countries his research has chiefly concerned
his native Australia. He has worked in regional economics, urban economics, public finance and
mineral economics, the latter as an adviser to the Land Councils which represent the interests of
Aboriginal people in the Northern Territory of Australia.
The Experience of Australia and Kazakhstan in the Mineral Price Boom of
2006-14.
Ian Manning
Despite striking similarities, Australia and Kazakhstan are seldom compared. This paper first
identifies some of the common characteristics of the economies of the two countries, particularly the
policy challenge presented by the high mineral prices which prevailed from 2006 to 2014. The paper
then contrasts the responses of the two governments.
What Australia and Kazakhstan have in Common
In physical size, Australia is the world’s largest country without land borders while Kazakhstan is its
largest landlocked country. Though Kazakhstan has but one-third the land area of Australia, the two
countries have roughly similar populations (a little either side of 20 million) and both comprise a flat,
arid core (desert, savannah, steppe) fringed (at least to the north and south) by better-watered country.
Both have high ratios of mineral reserves to population and in both mineral resources contribute
strongly to both exports and GDP but account for a relatively small proportion of total employment.
In both countries the range of mineral resources includes coal, metal ores and hydrocarbons, but
Kazakhstan is relatively rich in liquid petroleum resources and is able to export oil by pipeline;
Australia is less than self-sufficient in liquid petroleum and though it has surplus production of gas,
export requires the shipping of LNG.
Despite the current prominence of mineral exports, both countries have diversified economies.
Kazakhstan inherited significant manufacturing industries from the USSR. Some of these, notably
defence industries, had a limited future under the new dispensation, while the rest required
redevelopment to meet the challenge of competition from outside the Commonwealth of Independent
States. Its trade-exposed industries also include pastoral production, broad-acre cropping and a small
amount of specialised cropping, though it has yet to exploit its advantage as the country where apples
originated.
Australia used tariff protection to develop its manufacturing industries during most of the 20th Century
but in the 1980s and 1990s realised that the domestic market was too small to support competitive
scale; it was therefore obliged to redevelop its manufacturing sector and integrate it into the global
economy. Like Kazakhstan its trade-exposed industries include pastoral production, broad-acre
cropping and specialised cropping in addition to manufacturing, but unlike Kazakhstan it also exports
services, notably tourism and education.
Though GDP per capita in Kazakhstan is around one-fifth of that in Australia the industry structure of
the two economies is sufficiently similar to make comparison of economic performance interesting.
However, the two countries are seldom compared and few people are familiar with the circumstances
of both. In the present case, I am far more familiar with Australia than with Kazakhstan and my
references to the latter are necessarily tentative.
Comparison is particularly instructive over the last decade. From 2006 to 2014 both countries
experienced a substantial though temporary improvement in the terms of trade due mainly to booming
international prices of their various minerals. Given its endowment, Kazakhstan has particular
exposure to the price of oil and condensate but also benefits from high prices for coal, iron ore,
chrome, manganese, uranium, base metals and bauxite. Australia’s major exposures are to the prices
of iron ore and coal, but it also benefits from high prices for LNG, manganese, uranium, base metals
and bauxite.
Thanks to its less diversified export base, dominated by minerals, the boom in the terms of trade was
more marked for Kazakhstan than it was for Australia – from an index value of 100 in 2000, the terms
of trade of both countries peaked in 2011, reaching 234 in Kazakhstan and 200 in Australia. As
resource price booms go this was of considerable amplitude and was also unusually long-lived. What
caused this?
Characteristics of the mining industry
Several characteristics of the world mining/petroleum industry are relevant (we will treat this as one
industry though there is little overlap between companies involved in petroleum and those primarily
mining metal ores, with some overlap in coal). The industry is technology-intensive and capitalintensive. Except in the case of scavenging operations it generates few jobs for every million dollars
invested or for every million dollars of value added. Much of the capital-intensity is due to the costs
of mineral exploration, though production is also highly mechanised.
Not only is mining capital-intensive; the industry likes to claim that it should be rewarded with high
average profitability to compensate for high levels of risk. Mineral exploration is necessarily a chancy
business, though scientific methods have improved the odds and exploration risk also varies
considerably across mining industries, being much lower for coal and iron ore than for base or
precious metals. Even when the deposits are found and developed risks remain, since deposits vary in
quality and in the certainty with which reserves can be estimated.
The treatment of risk divides the mining sector into three main types of business. First, there are small
high-risk operators chiefly engaged in exploration but sometimes extending into mine operations,
generally financed by people with a high appetite for risk. Second, there are large multi-national
corporations which manage risk by maintaining a varied portfolio of mining tenements and also by
accumulating technical expertise. Finally, national mining companies maintain asset portfolios
confined within their country of ownership and aim to extract profits for the owning country.
In Kazakhstan, to my limited knowledge, the mining sector consists of a mixture of national mining
companies and multi-national operators. Compared to Australia, small businesses seem to be absent.
Business types include corporations directly owned by the state, corporations indirectly owned by the
state via its Samruk-Kazyna Sovereign Wealth Fund, joint ventures between these state-owned
corporations and a multi-national mining company, and multi-national mining corporations operating
in their own right. The need for high-order technical expertise in Kazakhstan’s oil and gas industry
has seen joint ventures proliferate in the petroleum sector, including some in which the national
interest is in a distinct minority.
The Australian mining industry is dominated by multi-national corporations. However, Australia also
has a tradition of fostering small mining companies, particularly speculative ventures in mineral
exploration. Because of the large scale required for successful oil and gas exploration and the
relatively small exploration component of iron ore and coal production, these small companies were
less involved in the 2006-14 boom than they were in its predecessors based on base metals or gold,
though the boom provided an opportunity for some of the ‘junior miners’ to become producers. By
contrast with Kazakhstan, there is a complete absence of government equity participation in the
industry, though each state government is deeply involved in the administration of mining tenements
and maintains a geological survey, including a public archive of past exploration results.
In both Kazakhstan and Australia sub-soil mineral resources are the property of the state (in Australia
literally so – Australia is a federation with a central and state governments, and mineral resources
belong to the states). In Australia this generates three-way conflicts of interest between governments,
the mining companies and the users of the land surface. The mining companies seek unfettered access
to mineral deposits, surface users sometimes oppose such access and, when access is granted, seek
compensation and a guarantee against environmental degradation, while the states adjudicate these
competing interests and also seek compensation for the sale of their sub-soil assets. In general,
Australian mining law grants miners access to deposits subject to environmental guarantees and the
payment to the state of a small proportion of the value of minerals produced – effectively a resource
price. During the recent boom a proposed increase in this price was withdrawn after a well-resourced
political campaign. The increase would have involved the collection of resources rents by the central
government in addition to state resource prices.
In Kazakhstan conflict over the sale price of minerals mined has been avoided by state ownership.
However, potential conflicts arise when national mining companies seek the expertise of multinational
miners, typically through joint ventures.
The industry’s sensitivity over land access issues derives from the importance, for profitability, of
low-cost access to quality mineral deposits. Compared with manufacturing, services or even
agriculture, the industry has very limited capacity to raise profitability by engaging in product
differentiation; it sells standard commodities. Further, it cannot browbeat its customers, who are in
general manufacturers, many of which have substantial financial clout and the capacity to integrate
backwards into mining should the mining specialists charge too much. Profitability accordingly
depends on cost control, best achieved by mining high-quality deposits. In Australia the industry and
the state governments bargain over the terms and conditions of access to deposits; in Kazakhstan
bargaining is more likely to be concentrated on the formation of joint ventures. Ultimately the
bargaining power of the state parties, as owners of unexploited resources, depends on their
willingness to leave their minerals in the ground; hence the necessity for mining companies to offer
such benefits as employment and local incomes. Needless to say the bargaining can be intense and in
Australia at least there has been evidence of corruption.
Despite the industry’s attempts to regulate supply, it has been unable to establish stable prices. A price
increase such as that recently experienced begins with unanticipated demand. Prices rise, and the
industry initially attempts to cash in by moving stocks and working mines at capacity. These are
periods of high profitability for the established miners. A recognition lag ensues during with both
established and would-be miners contemplate investing in capacity expansion. This lag was unusually
long during the recent episode because the 2008 American crash dampened expectations of demand,
particularly in Western capitals. The boom was also unusual in that expanded supply of the priceboom minerals – iron ore, coal and even oil – did not require major exploration expenditure; instead it
required major investment in extraction and product transport. The investment phase of the boom
lasted half a decade and was marked by optimistic forecasts of continuing demand. Eventually these
investments raised supply capacity while several factors dampened demand prospects, including the
effects of fracking on oil supply, a change in the pattern of Chinese economic growth and worries
about the contribution of coal to global warming. The boom is now slumping towards the normal
conclusion of mineral booms – expanded production at prices which are profitable for low-cost
producers but which cause the closure of high-cost operations, including the more speculative of the
investments made during the boom.
When mineral prices rise, old hands in the industry expect prices to return to ‘normal’ and perhaps
over-correct. They are accordingly cautious when considering capacity expansion, but two other
factors favour investment: enhanced profits raise cash flow and allow capacity expansion to be funded
from internal sources, and established mining companies can be anxious to protect market share. In
Australia at least, the investment boom was further fuelled by new entrants to the industry and by
small, high-risk companies anxious to gain substance. Many of these investors, including perhaps a
majority of those who sank resources into mine expansion, expected that prices would fall but plateau
at a level rather above that prevailing before the boom took off.
High mineral prices also raise questions for governments. Governments are in as good a position as
mining company executives to know that mineral price booms are generally temporary. Whatever the
shortcomings of their royalty and taxation arrangements, they can expect a revenue windfall, with the
amount of the windfall depending on the extent to which past bargaining has placed them in a profitsharing position with the miners. Prudent uses for the revenue thus received will emphasise
strengthening the public balance sheet, which can be done in various ways – paying down debt,
accumulating financial assets and accumulating infrastructure assets being the most widely
recommended. Prudence would also direct support to the industries temporarily eclipsed by the
mining boom, but which will be required to carry the national economy once the mining boom is over.
Imprudent uses for the revenue will include investing it in ways which heighten the boom (for
example, supporting marginal capacity expansion in mining) and, even worse, spending it on
consumption, either directly on current government services or indirectly through cuts in general
taxation.
The Australian response
Whatever prudence might dictate, as soon as the boom begins to elicit significant investment and
construction activity increases, governments have perforce to respond. In Australia the investments
generated by the recent mining boom took place in mainly in regions more than a thousand kilometres
from the nearest metropolitan area, though activity in coal mining increased in one region close to a
city which could supply former industrial workers to work in construction. Similarly Kazakhstan’s oil
industry is located mainly in the west of the country, well removed from major population centres
though with an inheritance of Soviet-era oil towns. In both countries, accordingly, the mining boom
had distinct geographic aspects.
In a market economy like Australia the primary mechanisms for transferring construction industry
resources to the booming region are prices – high wages and high returns for capital employed in
construction. These high wages and high returns add to the windfall profits generated by high mineral
prices and can easily result in increases in aggregate demand which run beyond economic capacity, so
resulting in demand inflation. However, this did not eventuate in the recent Australian experience, for
several reasons. First, many mining industry inputs, such as diesel fuel, are sourced overseas, and the
industry itself is substantially overseas-owned so much of its windfall profit went straight back
overseas. Again, much of its investment demand was spent overseas buying construction materials
and mining equipment. However, the industry contributed directly to domestic demand for labour, and
here lay a potential contribution to demand inflation.
Price incentives indeed play an important role in mining industry labour recruitment. The industry and
its construction contractors pay high wages, not only to attract workers to remote locations but to
compensate for the industry’s lack of commitment to training and in exchange for strict observance of
employment conditions. The geographic effect of these policies is spread by fly-in fly-out labour
contracts, which combine 12-hour shifts on site and off-duty periods at residential locations generally
far removed from the mine. Australia also has a propensity to address perceived labour shortages by
overseas recruitment, which is perceived to be cheaper than domestic training. Immigration, onerous
working conditions and fly-in fly-out minimised the pressure to extend the high wages paid in mining
to labour generally and in general the wage-increasing effects of the mining boom were confined to
the mining regions.
Though the confinement of mining-related wage increases to the mining regions (admittedly with
some flow-through to the fly-in fly-out source areas) helped to limit the inflationary effects of the
boom, this does not explain why the increase in incomes did not generate inflation. One reason was
that much of the Australian economy – many regions, many industries – was not operating at full
employment and could increase output readily without any increase in costs. A second reason was the
behaviour of the exchange rate. Since the adoption of American-style free market policies in the
1980s, Australia has charged its Reserve Bank with manipulating the official interest rate so that
consumer price inflation remains in the 2-3 per cent range. Faced with an increase in demand due to
enhanced incomes resulting from the mining boom, the Reserve Bank maintained a significant
positive differential between its interest rates and those of the major Western economies, so
encouraging an inflow of funds, chiefly short-term deposits with Australian banks. The result was an
increase in the exchange value of the Australian dollar, which in 2012 rose to the point where the
market rate against the US dollar was 1.55 times the purchasing power parity rate. The resulting
reduction in the prices of imported consumers’ goods ensured that the Reserve Bank met its consumer
price index target.
Unfortunately this strategy for avoiding consumer price inflation had two costs – the effect on nonmining trade-exposed industries and the effect on the national balance sheet.
Australia’s non-mining trade-exposed industries include agriculture, manufacturing and services.
Australian agriculture is accustomed to variable profitability brought about both by adverse seasons
and by fluctuating world prices. To this extent it was better prepared than the other trade-exposed
industries for the adverse effects of the over-valued exchange rate on its competitiveness. On the other
hand, it lost the opportunity to rebuild financially after the prolonged drought which overlapped with
the mining boom, and was also deprived of funds to invest in product differentiation and marketing.
The effect of the over-valued exchange rate on Australia’s major service exports – tourism and
education – was more direct. Sales fell and in tourism at least personnel and assets were underutilised. However, these two industries can be expected to recover as their price-competitiveness is
restored.
In the early 1990s Australia reduced tariff protection for manufacturing industries and substituted
various forms of industry modernisation plan. The effects included closure of much of the textile,
clothing and footwear industry balanced by modest prosperity for most other manufacturing
industries. However, from 1996 onwards the central government withdrew from industry
modernisation, making it harder for domestic manufacturers to develop export markets and to meet
import competition. As the Australian dollar became over-valued, the central government backed
away from industry assistance even in the established forms of expenditure on industry-related
education and infrastructure. The resulting squeeze on industry profitability was all the more serious
since it lasted for five or six years and so exceeded the capacity of manufacturing industries to rideout short term adversity. It has (at best) reduced industry investment due to constrained cash flow and
(at worst) brought about industry closures. Unlike tourism, the industries so closed are unlikely to reopen, since they depend on specialist skills and product development which are difficult to recover
once lost.
Not only did the Reserve Bank’s high exchange rate policy impose serious costs on the non-mining
trade-exposed industries, it had more direct effects on the financial side of the national balance sheet.
The chief of these arose because it encouraged the trading banks to borrow overseas. The banks
proceeded to on-lend these funds to the household sector chiefly as mortgages. The conventional
wisdom is that funds borrowed from overseas should be invested in enterprises which generate
overseas earnings with which to repay the loans, but in this case trade-exposed businesses had little
appetite for borrowing owing to their constrained profitability while the mining sector either financed
itself or was overseas financed. Some of these bank loans to households financed urban residential
extension, though the pace of extension was limited by lack of public investment to maintain
accessibility. Other loans, either directly or via the purchase of established properties leading to land
price inflation (which is not included in consumer price inflation) brought on a burst of debt-financed,
import-satisfied consumption. The most that can be said is that the government used prudential
controls of the finance sector to curb the proliferation of sub-prime loans and derivatives which so
destabilise the American finance system.
Compounding the problem, the central government deemed the increase in revenue which resulted
from the mining boom to be permanent and granted tax cuts, chiefly to the wealthy. To be fair it
collected enough tax and controlled expenditure sufficiently to maintain a public sector surplus and
made a half-hearted attempt to accumulate financial assets (officially as a superannuation fund for
public servants). It also increased its level of infrastructure investment, though not sufficiently to
overcome the backlog which had been accumulating since the privatisation of the public utilities in
the 1990s. These fiscal responses did little to counterbalance the Reserve Bank’s policies and
probably, on balance, intensified their effect on debt accumulation. The household sector became
heavily indebted to the banks (at least relative to income) and the banks became heavily indebted to
overseas lenders (at least relative to export earnings).
In real assets, therefore, over the mining boom Australia gained mining capacity and urban
extensions, but lost investment in manufacturing and also, less seriously perhaps, in its other tradeexposed non-mining industries. In financial structure, it became exposed to the availability of shortterm international finance. Counterfactuals are always problematic, but it is at least arguable that
Australia as a whole would have been better off without the mining boom, or at least that the nonmining regions would have been better off, the more so as lost opportunities in manufacturing
continue to accumulate and the results of mining investments continue to disappoint.
Australia has recently had a reputation for astute economic management – it avoided both the 1998
Asian financial crisis and the 2007 global financial crisis. Its governments, as distinct from its finance
sector, are not heavily indebted. With the limited range of policy instruments it allows itself, the
government could certainly have done worse in its management of the mining boom. It could also
have done better – it could have forgone tax cuts and spent more on industry modernisation; it could
have applied stronger prudential controls to inhibit bank overseas borrowing, though by limiting the
increase in the exchange rate this may have imperilled achievement of the inflation target. This
highlights Australia’s lack of means to control inflation other than interest rates. Australia still has the
remains of a centralised wage-bargaining system, but has never succeeded in developing incomes
policies to control inflation due to excess income claims – hence the targeting of interest rates on
inflation rather than on industry competitiveness and hence, perhaps, the failure to derive lasting
benefit from the high mineral prices of 2006-12.
Kazakhstan’s response
As noted above, from 2003 to 2011 Kazakhstan experienced an improvement in its terms of trade
which was even more marked than that for Australia. (In both countries there was a single-year
decline in 2009 but in both the peak came in 2011.) However, it was not all easy going. In Kazakhstan
the downward blip in the terms of trade between 2008 and 2009 induced a rather violent financial
reaction. As in Australia, the banking sector had been supporting the property market with mortgage
loans, resulting in a construction boom and increasing housing prices. Unlike Australia, where the
2009 downturn in the terms of trade was disconnected from housing prices by a government stimulus
package, in Kazakhstan the downturn was rapidly transmitted into house prices and hence into the
stability of bank balance sheets. However, the Kazakhstan government was able to make use of its
very substantial reserves of foreign exchange (the result of prudent administration of its oil revenues)
to stabilise the economy and renegotiate the terms of borrowing to take advantage of the general
decline in world interest rates. The stock of overseas debt continued to grow, but the debt service ratio
peaked at 58 per cent of export earnings in 2010 but fell to 35 per cent in 2011 despite a small further
increase in debt outstanding.
During the first part of the mineral price boom, the years to 2007, Kazakhstan’s gross national income
per capita expanded by 10 per cent a year or more, but the financial troubles saw the rate fall back to
1.5 per cent in 2008. With confidence improving as the terms of trade continued favourable, the rate
increased, returning to nearly 10 per cent in 2013. However the terms of trade are now definitely in
decline, the rate has again fallen and the government is once again taking reserves out of the
stabilisation fund.
By contrast with Australia, with its Reserve Bank steadily pursuing low consumer price inflation, the
first part of the mining boom was associated with significant inflation – around 21 per cent in 2006
and again in 2008 (IMF GDP deflator). The events of 2008 brought this sharply back to 5 per cent in
2009, with a quick recovery to nearly 20 per cent in 2010 from which it subsided to 9 per cent in
2014. It is likely that the terms of trade had a major influence on these movements.
Thanks to its substantial foreign exchange reserves, Kazakhstan has been able to maintain a managed
float of the tenge. Given the divergence of exchange rate trends among Kazakhstan’s major trading
partners, the appropriate value for the currency must be much debated – the value considered
appropriate for industries closely linked to Russia is likely to diverge from the value considered
appropriate for industries linked to China or Germany. The policy seems to have been to maintain a
gentle appreciation of the real value of the tenge, resulting in the IMF implied purchasing power
parity exchange rate inflating each year by less than the GDP deflator. The difference was least in the
crisis year of 2008 – less than one percentage point – but in the early boom years 2005-07 approached
4 percentage points. This modest appreciation contrasts strongly with the high exchange rates
experienced in Australia.
With significant capture of the windfall gain in the terms of trade by the state, not least through its
sovereign wealth fund, Kazakhstan was able to raise gross capital formation to 35 per cent of GDP at
the peak of the boom. This has favoured industrial growth, as has the maintenance of a reasonably
competitive exchange rate, and high technology exports have increased as a proportion of
manufactured exports. However, the Kazakhstan government has been criticised by the World Bank
for its failure to encourage multi-national mining companies to developing its non-petroleum mineral
reserves. The Bank follows mining industry practice in characterising royalties as a tax rather than as
the sale price of state-owned resources and argues that Kazakhstan has set its non-petroleum mineral
resource prices too high to attract overseas investment. The contrary argument is that, despite high
prices for produced minerals, competition between resource-selling nations has resulted in mining of
metallic minerals generating such low resource rents that, in Kazakhstan’s case, the minerals are best
left in the ground, at least for as long as the petroleum industry yields a satisfactory flow of export
revenue.
Conclusion
We have argued that loss of capital stock in the non-mining trade-exposed industries due to overvaluation of the exchange rate has meant that Australia would probably have been better off had its
terms of trade remained steady from 2003. It would be difficult to apply the same reasoning to
Kazakhstan, where despite inflation and a financial crisis, the exchange rate has been kept under
control and the boom in the terms of trade has been used to enhance the national capital stock.
Notes on sources
For greater detail on the account of the Australian economy in this paper see the National Institute
of Economic and Industry Research State of the Regions reports, published annually by the
Australian Local Government Association. The account of Kazakhstan is drawn mainly from IMF and
World Bank sources, including the World Bank paper ‘Comparative Study of the Mining Tax Regime
for Mineral Exploitation in Kazakhstan’, 2014.