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Academic rigour, journalistic flair

Australias five pillar economy: mining

May 1, 2015 6.46am AEST

Author

Anne Garnett
Senior Lecturer in Economics, Murdoch
University

As economic growth in China moderates, so will its demand for Australias raw materials. AAP
Image/Alan Porritt

In his 2013 election campaign, Tony Abbott promised his government would build a world-class
five pillar economy, encompassing manufacturing, agriculture, services, education and mining.
Two years later, as his government prepares its second federal budget, just how are these sectors
faring?

The prices of exported goods over the past year have stabilised or fallen, particularly for iron ore, oil
and coal. Australias mining sector is also moving from the construction phase (which creates
considerable employment) to the operation phase (which requires up to 10 times fewer workers). So
its a good time to have a look at the mining sector in a more historic context and examine the outlook
for the future.

Australias mining sector has been hailed as a saviour to the economy, protecting it from the effects of
the severe economic downturns experienced in the USA, Europe and other countries during and after
the global financial crisis of 2007-08.

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There is no doubt that the minerals and energy boom of the 2000s was responsible for much of the
growth in commodity export earnings. It also protected economic growth rates and, to some extent,
jobs during this time. The mining boom was in large part due to the significant increase in demand for
raw materials and energy by China and India during their very rapid economic growth over the past
decade.

Mining and the economy

The mining sector currently contributes around 8.5% to Australias GDP (total output), and employs
around 2% of the workforce (about 220,000 people).

However, as with most primary products, this underestimates the impact of the mining sector.
Downstream processing sometimes means that production is not counted as mining output, and is
instead counted as manufacturing. Theres been a lot of discussion about taxes but for 2013-14
financial year, the mining sector paid about $12.7 billion in taxes (which includes just $170 million
from the now defunct carbon tax), and another $10 billion in royalties as payment for the minerals (to
state governments).

The mining sectors biggest impact is on exports - in recent years it has made up over 50% of
Australias total export earnings. The effect of the mining boom on exports has been huge for
example, between 2000 and 2010, the value of exports from mining rose by over 120%, from $63
billion to $139 billion.

According to the Australian Bureau of Statistics and the Department of Industry and Science,
earnings from minerals and energy exports reached $195 billion last year. The graph below shows that
iron ore and coal dominate export earnings, followed by liquefied natural gas (LNG).

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Australia's major mining exports

The value of Australia's major minerals and energy exports (A$ billion), 2013-2014

Source: Department of Industry and Science Get the data

The mining sector is largely dominated by a few large firms economists would say that it has a high
concentration ratio. While there are over 1300 mining firms in Australia, production is dominated by
very large firms, such as BHP Billiton, Rio Tinto, Xtrata, Shell, Chevron and Woodside Petroleum.
The development of mining has relied heavily on foreign investment, without which we would have a
much smaller mining sector than we have today.

The ups and downs

At the federation of Australia in 1901, when primary industries were relatively more important, the
mining sector contributed about 10% to total output, largely due to gold mining.

However minings production and significance fell over the next 50 years, and in the 1950s, demand
for Australias minerals and energy was much, much lower, and the costs of production and
transportation much higher.

In the 1960s, things began to change. The United Kingdom joined the European Union and traded
less with Australia, so Australia began to look for new markets in Asia. Australia abolished post-World
War II legislation that prohibited selling minerals to Japan (which was originally put in place for fear
by some that iron ore might be used in weapons against Australia), and today Japan is Australias
second-largest export destination after China.

From the 1980s onwards, growth in emerging Asian economies saw demand rise even further. On the
supply side, larger, more efficient shipping lowered the costs of the transport of minerals, and new
technology lowered mining extraction costs.

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The following graph shows how significant the change over time has been in the value of mining
exports to the Australian economy.

Contributions to exports
Percentage contributions to Australia's exports by major sectors, (1950, 1970, 1990 and 2014)

Source: Australian Bureau of Agricultural and Resource Economics, Australian Commodities Statistics, and Department of
Industry and Science Get the data

Changes ahead

Short-term forecasts are that increases in supply by other countries, together with slowing demand,
will see a fall in export earnings from mining over the next year or so. Also, as economic growth in
China moderates, so will its demand for raw materials.

However, demand for energy will continue to grow worldwide, and by 2020, it is estimated that
Australia will be the largest exporter of LNG in the world, and probably also coal.

Australia currently has long-term (over 20-year) contracts to supply gas to China, India, Japan and
South Korea. According to forecasts by the Department of Industry and Science, minerals and energy
export earnings will increase by around 6% per year between now and 2020.

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So, while the mining boom is over, and the industry moves into its operational phase and therefore
employs fewer workers, the outlook seems generally good.

But as economists often say, that is assuming nothing else changes.

This the third piece in the series. Read more here.

Mining Mining boom Australian economy Federal Budget 2015 Five Pillar Economy

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