Almost everyday we hear about how commodities exports have helped protect Australia (so far) from the worst of the global economic crisis. However although Australian exports have held up well prices and volumes have still fallen for many mining products but almost nobody seems to be asking the question, what will happen if demand and prices for some key Australian commodities never returns to the levels reached in 2008?
Sometimes I wonder if many Australian financial journalists and market commentators realise that the world is a fairly big place and that Australia is not the only nation that digs stuff out of the ground. In addition many seem blissfully unaware that some nations realise that they rely on Australia too much for everything from LNG to Uranium and are actively seeking alternative sources of supply or ways to reduce demand.
We also have the Government and Treasury confident that the demand for resources will pick-up again and in fact they are counting on this to help pay down Australia’s debt in the years to come. But is it possible that demand for some of our key mining exports has already peaked and that prices will remain below recent highs for many years to come?
GaveKal Research have a very talented oil market specialist named Ahmad Abdallah who has written for some time now about Peak Demand which is a scenario where oil starts to enter not only a long term decline in terms of supply, but also in terms of demand. Many people often raise their eyebrows when a long term fall in oil demand is mentioned but consider this, Japan’s oil use peaked back in the 1970’s and apart from some blimps along the way has managed to keep below 1970’s levels ever since.
Demand reduction for commodities such as oil, coal and even iron ore can be achieved via improved technology, product substitution or simply just because of reduced economic activity. In Japan’s case smaller more fuel efficient vehicles combined with an excellent mass transit system have helped reduce the need for imported oil.
So you may ask how would a nation reduce it’s demand for coal? Well many G20 countries are already looking at non-fossil fuel sources of energy as a way to reduce their CO2 emissions and although Australia seems all starry eyed about so called “Clean Coal”, most large energy consuming nations are pushing ahead with plans to build more nuclear power plants and carry out capacity upgrades. (see: Plans for New Reactors Worldwide )
In addition billions of dollars are being spent worldwide on new facilities to generate energy from the sun, wind, water, tides, garbage and even the earth’s own trapped heat. (geothermal) So isn’t it possible that coal in any form will become a less desirable source of energy as the 21st century progresses? Then of course there will be further improvements in energy efficiency and this will reduce (to some extent) the growing demand for energy across the world anyway.
Iron Ore on the other hand has no known substitutes and is likely to be very much in demand for many years ahead. However this does not necessarily mean that the demand for Australian iron ore will continue to rise and that Australian miners will be able to set prices again in the future. Africa and Russia for example are also ramping up production and in the years ahead countries like Brazil and Australia might find their iron ore operations facing much stiffer competition.
In 2008, iron, iron ore and steel plus coal made up 36% of Australia’s total merchandise exports and altogether mining exports contributed 61%. If we compare this to say Canada (another resource rich country similar to Australia) we find their mining exports only contributed 35% but overall they are a bigger exporter than Australia.
How can this be you may ask? Simply because Canada is also a significant exporter of manufactured products which contributed 31% of the value of their exports compared to a paltry 7% for Australia. (source: Australia and Canada – Comparing Notes on Recent Experiences) I suggest readers have a look at the above speech by Glenn Stevens from the RBA, it is an interesting read.
Because Canada has a more diversified economy this has meant that so far it has suffered more than Australia as a result of the global economic downturn. However this also means that Canada is better positioned to deal with any long term softness in commodities prices. In Australia mining exports have delivered the good times, but our reliance on them could also cause us a lot of pain in the future.
Imagine how Australia’s trade figures would look in the years ahead if demand for Australian iron ore and coal never recovered to 2008 levels and prices remained flat. This would slash billions off the value of our exports and it is quite possible that other exports may not be able to make up for this drop.
Remember we are not the only supplier of commodities. Japan aims to source Uranium from Russia and is actively seeking to reduce it’s dependence on Australia coal by building a number of new generation nuclear power plants. China has increased iron ore imports from Russia and also has plans to ramp up energy generation via nuclear power.
There are large deposits of iron ore and other commodities in Africa and even within Asia there are mining operations that have yet to reach their full potential. So is it wise for Australia to be so complacent and believe that we are somehow the undisputed mining champions of the world?
It may appear inconceivable to many that Australia’s strong mining sector could be challenged in the future and even face a period of decline. But 20 years ago how many Americans thought that their car industry would end up on it’s knees? Didn’t they once think that their auto workers were the most productive in the world and that the United States would continue to dominate the car market across the world….or at least domestically!
Of course I could be very wrong; the Japanese and Chinese may forgive Australian miners for charging over the top prices during the boom, things could all get back to normal and demand and prices for Australian commodities surge back up again. But what if I am right?
Where is Australia’s Plan B and I wonder if the Treasury modelled any scenarios where commodities exports remained weak for many years and if so, what impact will this have in terms of future Federal Budgets and in reducing Australia’s debt? Do we as a nation have any plans to deal with a world where our miners may no longer be in such a dominant position?