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Australia and the Millennium Mining Boom
Professor Quentin GraftonExecutive Director/Chief Economist
Bureau of Resources and Energy Economics
Keynote presentation to ANCRE 2012
18th September 2012
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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
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I. Price Forecasting - Best and Worst of Times
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“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
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Selected commodity prices: peaks & troughs (nominal US dollars)
Pre-GFC
Peak GFC
Trough Post GFC
Peak Current Copper US$/t 8,985 2,770 10,148 7,561 Aluminium US$/t 3,292 1,254 2,772 1,870 Zinc US$/t 4,620 1,042 2,635 1,831 Nickel US$/t 54,200 8,810 29,030 16,240 Uranium US$/lb 136 42 73 49
Notes: prices are from the following dates Copper: 3-Jul-2008 24-Dec-2008 14-Feb-2011 29-Aug-2012 Aluminium: 11-Jul-2008 24-Feb-2009 28-Apr-2011 29-Aug-2012 Zinc: 24-Nov-2006 12-Dec-2008 7-Jan-2010 29-Aug-2012 Nickel: 16-May-2007 24-Oct-2008 21-Feb-2011 29-Aug-2012
Uranium: Jun-2007 Mar-2009 Jan-2011 Aug-2012
Source: BREE
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Tianjin Iron Ore Spot Prices (CFR)
20
40
60
80
100
120
140
160
180
200
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12
US$/t
62% Fe CFR Tianjin
Peak: US$186
TroughUS$118
Peak : US$192 Trough: US$163
Peak: US$181
Trough: US$117
Peak: US$148
Trough: US$87
Peak: US$106
Trough: US$76
Source: Bloomberg
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Historical Iron Ore Prices
50
100
150
200
250
300
350
1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
indexJun-66=100
Source: BREE
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Iron ore price & USD/AUD exchange rate
75
100
125
150
175
200
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12
US$/t 0.60
0.70
0.80
0.90
1.00
1.10
1.20
US$/A$
iron ore spot price, 62% CFR China US$/A$ (right axis)
Source: BREE
Correlation coefficient 0.74
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What if? Iron ore prices and exchange rate
2012–13 +/– 5% +/– 10% +/– 5% +/– 10%
Total R&E export earnings $189 b 2 4 – 8 – 18
–2 – 3 10 19
Exchange rate assumption 0.99 US$ / A$ Forecast iron ore price 104 US$/t
Exchange rateChange A$b Change A$b
Iron ore price
Source: BREE
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II. Macroeconomic Outlook & Overview
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Economic Growth in Key Export Markets
Source: IMF; BREE
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10 year bond yield spreads to Germany
Source: Bloomberg
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Debt Cycles and the Burden on Central Banks
Source: Bank of International Settlements
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Value of R & E exports: actual & forecast
Value of exports (A$m)
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Resources and energy 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
Source: BREE
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Volumes, Prices & Values of Key Exports
Source: BREE
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III. Millennium Boom
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Australia’s Terms of Trade
Source: BREE; RBA
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Australian Merchandise Exports to China ($2010-11)
10
20
30
40
50
60
70
1989–90 1992–93 1995–96 1998–99 2001–02 2004–05 2007–08 2010–11
A$b
minera l resources merchandised goods
Source: BREE
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Economic Variables: Before & During Boom(1.00 = initial year)Economic variable Unit Period average 1994-95 to 2002-03 2003-04 to 2011-12 Employment in Australia index 1.06 1.10 Employment in mining sector index 0.96 1.53 Unemployment rate % 7.4 5.0 Average household income (a) index 1.09 1.16 Nominal interest rate % 5.6 5.1 Real interest rate % 5.0 4.5
Source: BREE; ABS
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Mean Weekly H-Hold Income ($2011-12) NSW VIC QLD SA TAS WA NT ACT Australia 2002-03 805 752 698 700 643 719 755 841 752 2003-04 845 781 731 676 660 754 758 865 781 2004-05 865 800 772 700 710 791 799 931 808 2005-06 909 821 807 741 715 822 861 1007 842 2006-07 932 832 856 784 730 892 887 1043 873 2007-08 951 853 877 807 755 963 945 1039 900 2008-09 953 874 936 842 753 1005 975 1097 926 2009-10 983 923 986 868 800 1051 1026 1162 968 2010-11 1011 964 1011 900 849 1101 1090 1241 1003 2011-12 1038 998 1037 931 890 1192 1176 1308 1042 Ratio of 2011-
12 to 2002-03 1.29 1.33 1.49 1.33 1.38 1.66 1.56 1.55 1.39
Source: BREE; ABS
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Value of Exports ($2011-12) and Mining Employment
50
100
150
200
250
2002-03 2004-05 2006-07 2008-09 2010-11
2011-12A$b
50
100
150
200
250
'000people
employment in resources and energy (including services to mining) (right axis) total resources and energy export earnings
Source: BREE; ABS
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Commodity Prices (real): Past Trends & Projections
Source: BREE
100
200
300
400
500
600
700
800
2002-03 2004-05 2006-07 2008-09 2010-11 2012-13
index2002-03=100
iron ore metallurgical coal thermal coal
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Australian Capital Expenditures in Mining and Completed Major Mining Projects ($2011-12)
15
30
45
60
75
90
2001-02 2003-04 2005-06 2007-08 2009-10 2011-12
2011-12A$b
mining CAPEX value of completed projects
Source: BREE; ABS
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Cumulative real value of completed projects ($2011-12)
20
40
60
80
100
120
Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12
cumulative2011-12$b
Source: BREE
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Prospects: Value of advanced projects if NO NEW projects were announced ($2011-12)
Source: BREE
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Commodity Production: Past Trends
Source: BREE
50
100
150
200
250
300
2002-03 2005-06 2008-09 2011-12
index2002-03 = 100
iron Ore metallurgical coal LNG thermal coal
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Bulk Commodities Exports
Source: BREE
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Phases of the Millennium Boom
300
600
900
1200
1500
2002-03 2004-05 2006-07 2008-09 2010-11 2012-13 2014-15 2016-17Mt
100
200
300
400
500
index2002-03=100
capex2011-12 A$b
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)
phase I phase II & phase III
indicative figures only
bree.gov.auSource: BREE; ABS
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IV. Sustaining Australia’s Future
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Nineties versus Noughties
Contributions to growth in average incomes by decade(percentage points, annual average)
Labour productivityTerms of tradeLabour utilisationForeign income flows
2000s1990s- 1
0
3
2
1
4
Contributed 1.2% per yeargrowth in average incomes]GNI
per person
Source: Australian Treasury
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Three Ps: 1992-2002 and 2002-2012
Income
49%
Population
12%
Participation
1%
Productivity
18%
Terms of Trade
4%
1992-2002
2002-2012
Income: Real gross national income: Chain volume measures Productivity: Multifactor productivity, quality hours adjusted hours worked
16%
3%
- 3%
46% 86%
Source: BREE; ABS
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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
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Potential outcomes for income growth
Term
s o
f Tra
de
Productivity Growth
Maintain
Decline
3.7%
Low(2000s
)
High(1990s
)
Goldilocks
Productivity Agenda
Bears‘Bad
News’
2011-12
Source: BREE
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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.
