Correct me if I have misread the figures but it seems alarming that mining/resources revenue represents almost 25% of GDP.

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James,
To both your questions the answer is yes. I’m not too sure why it has you alarmed though?

Mining is by far Australia’s biggest export earner (as the middle set of columns shows). The dollar figures for industry revenue and export value have increased dramatically over the last five years for the mining industry, but even before that the products of mining were our number one export.

We, for better or worse, hold a large amount of natural resources in the ground, are very good at getting them out efficiently and safely, and we sit in a great location on the globe to provide these resources at good prices to the nations that need them. Ten years ago we shipped most of our products (our main earners are iron ore and coal) to Europe, Japan and Korea, but the last five have been dominated by China’s consumption.

Australia’s level of economic dependence on mining is why so much debate is occurring about the emissions trading schemes and how it may impact Australian miners – impacts on the mining industry translate directly into big impacts on Australia’s economy. If a carbon tax makes our mining products less competitive on the global market, our export earnings and GDP stand to take a big hit.

I’m really interested in why you would feel alarmed that mining is our big earner?

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James Tuckerman Reply:
January 28th, 2010 at 3:59 pm

Thanks so much Jamie.

I look at the Australian economy as I do my own company. When one source of my trade exceeds a certain percentage of all my trade (say over 25%), I start to worry. This is because it if I lose that one source, I’m in deep doo-doo.

I have always been aware that mineral exports represent a significant percentage of our GDP but I never expected it to exceed 25%. In short, it concerns me that Australia has such a vested interest in the one ‘product stream’.

Indeed, I’d also be curious to learn how much of our GDP can be attributed to the one ‘customer’. For example, if we lose that one product stream or that one customer, do we we stand to lose up to a quarter of our national revenue?

In the context of a company, this sort of development would be devastating. Yet, a company can still sack 25% of its people. I might sound like a ‘doom-sayer’ but indeed what would happen should a ‘cleaner-cheaper’ alternative to coal or a ‘stronger-cheaper’ alternative to iron be developed? Could we downsize Australia by 25%?

On a less ‘radical’ note, what happens if this one major customer scales back its growth plans and, as a result, has less need for our product?

My concern is not that mining is a big earner. I hope it is for generations to come! My concern is that, as a nation (or as a hypothetical company), we are far too dependent on a small number of industries that are heavily subject to external forces.

Yet, we don’t have a back up plan. We don’t innovate in the same way that, say, Finland does. This is because we currently don’t need to.

This is a double-edged sword, that could make us a vulnerable country over the next two or three generations. In fact, I suspect we are vulnerable already and over-dependence on too few industries only exacerbates this vulnerability.

Thems my two cents.

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James,
You are dead right in everything you’ve said! And I totally agree, if Australia were a company, or an investor, you might be concerned about too many eggs in one basket. And on top of that, the resources industry tends to cycle, meaning that sooner or later (theoretically) there will be a downturn.

One of the main reasons Australia has weathered the GFC better than some other countries is that China started buying our resources in much greater amounts at the exact time a lot of our other customers stopped buying them all together (namely Europe, Japan and the US). Had China not continued to boom and consume, our export earnings would have taken a real beating. So we got through the downturn in Europe on the back of China, but now we are on the back of China.

I would say a good portion of that 25% is now coming from China, and so we are quite exposed to any downturn in their growth and infrastructure investment. Meaning that the ‘hypothetical’ note you mentioned is actually far from hypothetical. China’s domestic coal market, for example, is so great, that at the moment they import only about 10% of what they consume. If they move from importing 10% of their needs to having 5% surplus to export (and hence compete with our products on the export market), prices for Australian products will fall incredibly and that export market will be lost to us virtually completely.

Australia (and the respective state governments) have rightly milked the mining cow, and it is a major supporter of our nation’s prosperity. But you are right, we must invest this money more heavily into industries and products that can replace resources export dollars. For example, Australia exports iron ore and coal to Japan, who then do all the value adding, and then ship completed cars back to us. We don’t do enough value adding, instead simply exporting raw materials.

Mining in Australia certainly isn’t going anywhere fast, but it is exposed to some major risks as an industry (downturn in China, changing demands, changing energy supplies, carbon tax costs). And as you say, we may not quite realise how major risks to the mining industry are actually risks to the whole country.

Cheers,
Jamie

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