How is Australia’s mining boom sucking resources out of the economy?

March 12th, 2008

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Back in Rising metals price=rising mining profits? Think again!, we questioned the rising profitability of the Australian mining sector,

The key point to note is that higher metal prices do not always translate to higher profit. Higher prices merely translate to higher revenue. Profit is the excess of revenue against costs. So, despite rising revenue, profit can actually fall if costs rise faster.

Rising costs is a sign that the economy is running out of resources to expand further. For the mining sector, these two articles in the news media illustrate the current situation:

  1. Fixing the resource boom’s bottlenecks
  2. THE good news is that the nation’s commodity exports fiscal year as the resources boom kicks in to full swing. But the question has become whether the mining industry can deliver the Australian Bureau of Agricultural & Resource Economics.

    Latest figures from the Australian Bureau of Statistics, released on Wednesday, showed exports of mineral ores were down 2.9 per cent in the December quarter while total mining production volumes slipped 1.6 per cent across 2007.

    A major part of the problem in taking full advantage of the once-in-a-lifetime resources boom is the clogged infrastructure on the eastern seaboard, namely the production chains leading up to and including the ports at Dalrymple and Newcastle.

  3. ‘Predator miners’ poaching sub crews
  4. CASHED-UP mining companies were lying in wait outside naval bases to poach submariners, fuelling a critical shortfall in crews for the Collins class submarines.

This is the dark side of the Australian mining boom. Although the booming metal prices is beneficial to the Australian economy, there is not enough resources (e.g. infrastructure and skills) in the Australian economy to fully take advantage of that. It has come to the point that the Australian mining sector is fighting against the rest of the economy for resources. As we said before in Why does the central bank (RBA) need to punish the Australian economy with rising interest rates?,

Therefore, in order to put the economy back into a sustainable growth path, consumptions and investments have to slow down in order to allow for the economy to catch a breather for the rebuilding of its capital structure. The rebuilding of capital structure is necessary for the economy to replenish its resources for the future so that growth can continue down the track. Unfortunately, this rebuilding itself requires resources now.

That is the reason why we believe the Australian economy is heading for a recession, which we had already sounded the alarm back in February last year (see Where are we in the business cycle?). It is actually a good thing, except that many Australians cannot afford to go through a recession because of debt.

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