A highly resourceful nation

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05 Apr 2012
Week in China

"A bigger vision for our economic future than being China's quarry and Japan's beach." That was the promise made by Kevin Rudd, when he campaigned against John Howard to be prime minister five years ago. As it turned out, Rudd (a Mandarin speaker and Sinophile) didn't get much time to see through on his promise, having been booted out of office by his own party two years ago.

But does the quarry jibe hold up? Omitting the reference to the beach-bound Japanese (and many Australians have moved on from the Japanese too, with China now taking on the bogeyman mantle), the gravitational pull on Australia's resources from the north has been growing.

In fact, the latest official data saw China's share of Australia's commodity exports hit 40% in the year to June last year, up from just 7% in 2001. In the process, Australia has become China's largest source of mineral ores, its largest provider of coal, and its second largest source of liquid natural gas (LNG).

Getting most of the attention is the cross-ocean conveyor belt of iron ore (A$40 billion of almost A$58 billion in total iron ore exports went to China in 2010/11), as well as the flow of coal (a smaller A$4.5 billion out of almost A$44 billion in exports globally).

But Australia sends large amounts of its resources to other countries in Asia too. For instance, Japan is the leading destination for its coal. It also has a more diverse resource endowment than coal and ore alone, with plenty of miners of minerals like gold, bauxite, copper, nickel and zinc. These are also being exported to more than just the Chinese. That makes the 'over-reliance-on-China' argument look harder to sustain.

More topical in the commodity debate is whether prices can maintain their upward momentum. Especially as many are warning that prices have already peaked, and that this is a boom that cannot go on forever. It has already lasted much longer than shorter mining industry upswings in the late 1960s and early 1980s.

The Chinese economy is shifting, it's changing. Steel growth rates will flatten and they have flattened.

Factor in a surge of investment in new mining projects and the fear is that extra capacity is going to arrive at the same time that global demand shows signs of faltering, especially for the pacesetters like coal and iron ore.

The gloomiest predictions are usually for iron ore, with one forecaster even warning of prices dropping to as low as $70 a tonne by 2016 (the record spot price was more than $200 a tonne in March 2008, although the highest price over a 12-month period was $168 last year).

Not that any of this seems to bother Fortescue Metals – Australia's purest-play iron ore bet – which has just announced a $2 billion bond issue to fund a tripling of its production volumes. Rival miner BHP is also steaming ahead with expansion plans of its own, despite acknowledging last month that industrial demand seemed to be slowing.

"The Chinese economy is shifting, it's changing. Steel growth rates will flatten and they have flattened," the president of BHP's iron ore division told media.

But for the bulls the longer-term story is still one of optimism, especially their view that Asia's urban and industrial transformation has a long way to run. The supporting case would include forecasts from the Reserve Bank of Australia (RBA), which estimate that each Chinese apartment requires almost six tonnes of steel to construct, or that every 10 kilometres of new subway requires an even weightier 75,000 tonnes of steel.

Then it's usually a quick round of export maths. On average, a tonne of new steel consumes about 1.7 tonnes of iron ore, as well as more than half a tonne of coking coal. And Australia is in the fortunate position of having a low-cost, high quality supply of both, the RBA notes.

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