--Clyde Russell is a Reuters columnist. The views expressed are
By Clyde Russell
LAUNCESTON, Australia, Aug 28 The resource boom
is often cast as both villain and hero in Australia, being
simultaneously recognised as a major driver of the country's
wealth but also as a destroyer of traditional industries.
Two recent research papers have highlighted this dual nature
of investment boom in iron ore, coal and liquefied natural gas
(LNG), and taken together show that while Australia has
benefited hugely from China-led demand for commodities, the
risks seem to be mounting.
First, the good news. Australia has largely avoided the
dreaded "Dutch Disease" over the past decade, according to an
Aug. 22 research report from the Reserve Bank of Australia.
"Dutch Disease" was coined by The Economist magazine to
describe the negative impact of a booming resource sector on
other parts of the economy, using the discovery of natural gas
off the Netherlands and the subsequent decline of that nation's
manufacturing as the eponymous example.
Over the decade to 2013, the resource boom boosted real per
capita household disposable income by 13 percent, raised real
wages by 6 percent and lowered the unemployment rate by 1-1/4
percentage points, the Reserve Bank researchers said.
While this was the good news from the investment of hundreds
of billions of dollars in boosting commodity output, the central
bank also found that the appreciation of the Australian dollar
weighed on industries exposed to trade, such as
manufacturing and agriculture.
"Manufacturing output in 2013 was about 5 percent below what
it would have been without the boom," the report said,
concluding that the de-industrialisation that sometimes
accompanies the development of resources has not been strong.
The Reserve Bank's views present a counterpoint to often
repeated claims by Australian politicians and media that the
country has "wasted" the resource boom.
These claims often are rooted in political ideology and most
often allege that either the proceeds of the boom have been
wasted by politicians on feel-good welfare, or alternatively
that the government hasn't collected enough revenue and
multi-national resource companies have ripped off the populace.
NEW PHASE, NEW CHALLENGES
If the Reserve Bank shows that Australia has navigated the
investment phase of the resource boom fairly well, consultants
Energy Quest show the scale of the challenges ahead.
The investment surge that kept Australia's economy humming
along through the 2008 global recession is "fading fast and
there are few signs of new projects on the horizon," Energy
Quest said in a research report on Thursday.
The report highlights the need for ongoing exploration of
new resources and lowering of costs, both labour and others, in
order to try and turn around the slide in investment spending.
But it also shows that the next phase of the resources boom
will deliver big benefits, with the value of LNG exports rising
from A$16.5 billion ($17.6 billion) in the 2013-14 fiscal year
to more than A$50 billion a year once the seven projects
currently under construction are completed.
What is currently happening is that the investment phase is
fading and is unlikely to be replaced given market concerns that
most commodities are likely to be in structural oversupply in
the next few years.
The end of the investment phase will gradually by replaced
by the production phase, which will boost Australia's export
earnings, but the question remains as to whether this will be
enough to keep the economy's record 23 years of unbroken growth
When the decisions to invest in expanding iron ore, coal and
LNG output were made, the general assumption was that commodity
prices were in a long-term bull market, led by Chinese demand,
and supported by the rising wealth of India and Southeast Asia.
However, as is usually the case with commodity booms,
companies across the globe added too much capacity, resulting in
too much supply coming online around the same time as China is
trying to shift its economic growth to less commodity-intensive
services and consumption.
The downgrading of commodity earnings can be seen in the
June report from the Bureau of Resources and Energy Economics
(BREE), a government forecasting agency.
It expects the total value of Australia's commodity exports
to rise to A$201.4 billion in the 2014-15 fiscal year, up 2.7
percent from A$196.1 billion in 2013-14.
However, the volume is expected to surge by 7.3 percent,
indicating that overall BREE is expecting, like most other
analysts, that major commodity prices will continue to struggle.
Iron ore is Australia's top export earner, followed by coal
and then LNG, although the super-cooled gas will overtake coal
once the under construction plants start operating.
The prices for all three have been falling, and among major
commodities it's possible they have the weakest medium- to
long-term outlook, given they are likely to be plagued by
While major producers such as BHP Billiton (all
three) and Rio Tinto (iron ore and coal) may well be
able to survive weak prices and make good profits through
cost-cutting and economies of scale, the news isn't that good
for the rest of the Australian economy.
Yes, state and federal governments will benefit from
increased royalties on resource extraction, but this will likely
be more than offset through lower corporate and personal income
While the Australian dollar may well weaken in this
scenario, its unlikely that this will do much to revive
An example of this is no matter how weak the local currency
becomes, it's virtually certain General Motors, Ford and Toyota
won't reverse their decisions to close Australian vehicle
assembly plants in the next few years.
It's become increasingly clear that the risks are mounting
for Australia, and a mild case of "Dutch Disease" may still
All three major players in the economy have made mistakes in
the investment phase of the boom; companies have over-invested
and needlessly competed with each other to build huge projects
all at once, labour has cashed in on the good times with little
thought to the future and politicians have largely engaged in
point-scoring at the expense of sustainable long-term policies.
Transitioning to the production phase presents new
challenges and the main risk is that the players haven't yet
realised the game has changed.
(Editing by Muralikumar Anantharaman)