We’re all going on a cheap overseas holiday
Is the mining boom back?
While everyone was on holidays, the price of iron ore has shot back up to $US158 a tonne.
It was iron ore’s slump to $US86 a tonne at the end of last year that sparked fears of the end of the mining boom.
In August, the mining giant BHP Billiton shelved expansion plans for Olympic Dam while Fortescue Metals Group announced plans to cut thousands of jobs.
By December, amid fear of the fiscal cliff and a volatile commodity outlook, the federal government also shelved its plans for a budget surplus in 2012-13.
But 2013 has brought a more optimistic mood on markets. Freed from the fiscal cliff fiasco, shares in the United States jumped to a 5 year high this week. It remains to be seen if this is a false euphoria that will quickly reverse next month as the US government hits its debt ceiling and can’t pay it bills.
Adding to the celebratory mood last week came good news from the world’s second biggest economy. Chinese exports surged 14 per cent last year, thanks to a recovery in orders from Europe.
Chinese imports also jumped 6 per cent - music to the ears of major exporters to China like Australia. Chinese steel mills, which had been running down inventories last year, are busily restacking them again and orders for Australian iron ore are top of the list.
BHP Billion shares are up 19 per cent from their lows of last year, Rio Tinto is up 37 per cent and Fortescue Metals Group a whopping 60 per cent.
But amid the price surge for iron ore, analysts at Credit Suisse have sounded a note of caution, describing it as a “last run up” before prices sink back to $US125 this year and to $US90 in 2015 as supply catches up with demand.
Even so, the chief economist at HSBC, Paul Bloxham, says reports of the death of the mining boom have been much exaggerated. The boom can’t be back, because it never went away. Even at their lows last year, commodity prices were still 270 per cent higher than 2000 levels, Bloxham observes.
“High commodity prices seem to be the new normal, as the rising importance of the emerging economies means global growth is more ‘commodity intensive’.”
Far from going from boom to bust, Australia’s mining boom is simply maturing as we move from the initial phase of the boom - super charged prices - into the second phase, where mining investment picks up in response to higher prices. The recent price hike just extends this transition period, pushing some previously uneconomic projects over the line again.
Eventually, however, mining investment will peak and we will move into the third stage of the boom, where export volumes surge, prices remain favourable, but the boom requires fewer workers to build new projects.
Already, iron ore is Australia’s biggest export earner, raking in $63 billion last year. This is a major boost to our national income, much of which goes into pockets of mining companies.
But all Australians benefit in some way from the boom. Higher profits feed into higher share prices for direct share owners and also for most Australians through their super nest eggs. By pushing up the value of the Australian dollar, the boom is also a boost to consumer’s spending power abroad. Cheap holidays, anyone?
The mining price and export booms also provide a boost to state and federal government tax revenue.
There remains a tantalising prospect that the federal budget may yet return to surplus this year, as higher prices boost company profits and result in the first collections for the new mining tax.
But veteran budget watcher and Deloitte Access Economics director, Chris Richardson, isn’t popping any corks yet.
“My best guess is that the budget is still in deficit,” he says, sticking to his forecast of a $4 billion budget deficit this financial year.
“Although the iron ore price news is great, and that’s an extremely important number, it’s not the only thing going on.”
The high Aussie dollar continues to cause pain in other sectors of the economy.
But the rosier commodity price outlook will not, however, have escaped the attention of the Reserve Bank which has already slashed interest rates by 1.75 percentage points in an attempt secure a recovery in the retail and construction industries to offset the end of the mining price boom.
Continuing strength in the mining sector gives the Reserve Bank more time to wait and see the impact of past cuts in stimulating these non-mining parts of the economy.
Markets have scaled back the chances of an interest rate cut next month from 40 per cent a 28 per cent.
Mortgage holders may wish for more rate cuts, but a rates pause would in fact be a sign of confidence that the Australian economy is not falling between the cracks.
We continue to live on the doorstep of the fastest growing region in the world.
And that’s a pretty good place to be.
Jessica Irvine is National Economics Editor.
Email: email@example.com Twitter: @Jess_Irvine
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