ECONOMIC AFFAIRS: by Jeffry Babb News Weekly
Australia's resources boom officially over
, October 27, 2012
Pundits are tipping that Melbourne Cup day will see another cut in the official cash rate to 3.00 per cent, or even 2.75 per cent, by the Reserve Bank of Australia (RBA), a sure sign of growing desperation in the face of the stalling resources boom.
Australia is not alone in experiencing an economic slowdown as resource prices ease. Canada’s treasurer is begging business to invest and take up the slack created by the tail end of the resources boom. This is especially painful for Canada’s Tory government, which until recently had been boasting that it had survived the global financial crisis better than any other developed economy.
Australia is dependent on Asia as an export destination, especially China and Japan. Japan — until recently our largest export market — is experiencing negative economic growth as a result of boycotts of Japanese goods, especially motor vehicles, following clashes with China over the sovereignty of the Senkaku islands in the East China Sea. Sales of cars produced by Japanese-invested companies located in China have fallen by half.
Japan buys three main commodities — iron ore, coal and natural gas. The Pilbara iron ore province in Western Australia, should anyone forget, was constructed on the back of Japanese demand and with investment by Japanese trading houses, which were also major customers.
Prices have not risen in Japan for 20 years, but it remains a major customer. Japanese firms, faced with deflation and an ageing society resulting from one of the world’s lowest birthrates, are looking to deploy their capital overseas, including Australia.
Japan is a major destination for gas from Australia’s North-West Shelf. Following the March 2011 earthquake and tsunami, and the resulting Fukushima nuclear meltdown, the Japanese government has given an undertaking to phase out nuclear power. Natural gas is seen as safe and environmentally-friendly. Australia has loads of gas.
What about China? Both our coal and iron ore shipments have gone backwards for the first time in 20 years.
The Pilbara has three main producers — Rio, BHP and Fortescue. Rio is more reliant on iron ore than BHP. It has recently announced a freeze on hiring. BHP is the most diversified of the Pilbara miners and has cut back on capital spending, most notably the Olympic Dam pit in northern South Australia.
Fortescue is the producer with the highest marginal costs and the least diversified of the three major miners. While Fortescue has recently refinanced some of its debt, it remains vulnerable to a continued China slowdown. The scuttlebutt is that unless the Chinese iron ore market picks up, Fortescue will be out of business within a few years.
China is the key to the future of our resources market. Two views are being promoted on this issue.
The first is that China’s current slowdown, which has seen a fall in its growth to 7.1 per cent, is cyclical. That is, it is just a recession and China will bounce back again. China, it is said, will once more begin building bridges to nowhere and constructing six-lane highways that carry one truck every half hour.
The fast-train network, which so captivates credulous groups on officially-sponsored tours, may or may not make a profit — we may never find out. But even socialists have to pay their bills eventually, and bank depositors expect to be paid interest, even if their money is earning a net negative return, adjusted for inflation.
The second view is that the Chinese economy has hit the wall and its slowdown is structural, not cyclical. According to this view, the China model of being the lowest-cost supplier and able to flood export markets with cheap goods is defunct. China’s costs have risen, and other countries in Asia and even Africa are stealing their markets.
American companies are being warned against doing business with Chinese telecommunication companies such as Huawei, which is also banned in Australia, on national security grounds. United States firms are returning their factories in China to America because costs are comparable and the product is better.
My view is that China is in recession and its communist government will do anything to boost growth because the Party’s legitimacy depends on maintaining prosperity.
Take this example. I have often asked tourists returning from Taiwan what they like best. They always say “the food”.
Even in China, where 400 million people are said to be “middle class”, it is virtually impossible to get the sort of food the average Chinese aspires to, such as pork. There just isn’t enough of anything to go around. People want health care, aged pensions and to avoid paying university fees for their children which will leave them indebted for the rest of their lives.
In all likelihood, China has hit the wall and growth will continue, but at rates the average Chinese would consider to be at recession levels — very bad news for our exporters.