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Issues:  Mismanagement of Mineral Resources

The following article is presented to encourage discussion and to provide information.  This article does not necessarily reflect Australian Voice policy.

Note:  Our present Mineral Resources policy is published at the bottom of this page.

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►  AUSTRALIA'S MINERAL RESOURCES

CONTRIBUTED

Wasted Boom Busts Future

  • by SATYAJIT DAS, The West Australian, 4 January 2016

Crash: The contagion flows through the economy with less income and investment and debt-default risk hurting markets. Source: Supplied

The super boom that would never end has ended. The collapse in commodity prices was entirely predictable.

The large run-up in commodity prices and mining activity was driven by significant underinvestment in mining assets and infrastructure in the 1990s reflecting low real prices for many commodities.

The combination of supply constraints and unexpected increases in demand, especially from China and India, led to a sharp increase in price levels. The industry responded with massive investment to increase production, assuming continued demand and high prices. Oversupply now coincides with weaker demand, which was excessively dependent on China.

While it has 20 per cent of the world’s population and around 13 per cent of global GDP, the Middle Kingdom consumes 60 per cent of the global production of concrete, 48 per cent of copper, 49 per cent of coal, 54 per cent of aluminium, 46 per cent of steel and 50 per cent of nickel. The dangers of this dependence have been increasingly exposed. Ironically, even if China can avoid a financial crisis from its rising debt levels, a successful rebalancing of its economy towards consumption and services would be adverse for commodities because of the reduced intensity of resources use.

The prospects of a price recovery are poor.

There is now overcapacity in many commodities. The overhang will maintain downward pressure on prices. Many producers will continue to overproduce to service debt or to maintain market share, delaying the equilibration of supply and demand.

The problems in commodity markets will affect the broader economy through a number of channels.

The first channel of contagion is income. Revenue of individual businesses will fall sharply. This will flow through into employees and suppliers. It will also affect governments by reducing tax and mining royalty revenues.

Our money has been burnt

Every $US1 a tonne fall in iron ore prices reduces Australia’s national income by about $US500 million. It also reduces tax and royalty revenues of resource-dependent States.

The second channel of contagion is investment. Planned spending is being cut back as projects are deferred, mothballed or abandoned.

Lower income and investment spending will adversely affect growth, employment and consumption. It will flow through into asset markets, for example into real estate prices initially in affected areas but ultimately more widely.

The third channel is financial markets. A significant portion of the expansion in resources was financed by debt. Global lending to the energy sector totals $US2.5 trillion. Between 2004 and 2014, emerging market corporate debt, a significant portion of it in China, Russia, Brazil, Mexico and Chile related to the commodity sector, rose from $US4 trillion to $US18 trillion, with most lent since 2008.

The default risk on this debt is increasing as borrowers face a toxic combination of declining commodity revenue, high debt levels and higher credit spreads. Banks with significant exposure to the resources sector will be affected and act as transmitters of the problem to the wider economy. The price and availability of credit will be adversely affected.

At current prices, many projects will not cover the cost of capital. This destroys the equity value of projects, making it hard to raise new capital to reduce debt.

The reality of recent Australian history is that the mining boom helped maintain income and buying power, as Australia extracted big rewards for its mineral resources, obscuring the lack of competitiveness, a narrow industrial base, lack of reform, chronic current account problems and reliance on foreign debt.

Australia may have substantially wasted the proceeds of high mineral prices. Between 2004 and 2007 alone, Australia benefited from more than $300 billion of windfall gains that were channelled primarily into tax cuts, poorly targeted government programs and consumption rather than into investment or setting aside money in a sovereign wealth fund for the future.

Present and especially future generations will pay the price for these poor policy choices.

 

FROM:  https://au.news.yahoo.com/thewest/wa/a/30482543/wasted-commodoties-boom-busts-our-future/


Satyajit Das is a former banker and author.  His latest book, A Banquet of Consequences, was published in September 2015.

 

FOOTNOTE:

This is the present Australian Voice Mineral Resources policy.

Mineral Resources...  

Australian Voice recognises that Australia’s mineral wealth is a finite resource which belongs to the nation and to its people.  As such, it needs to be managed for the benefit of all Australians and not exploited by a minority or for the benefit of foreign interests.  [CORE VALUE 6]

Australian Voice believes that a substantial proportion of all income derived from State Government royalties on extracted minerals should be re-invested equitably across the respective State directly into regional infrastructure of lasting value, such as roads, bridges, water storage facilities, schools, hospitals, rail and port facilities, regional airports, etc.

Australian Voice believes that all mining projects should be managed in the interests of the Australian people and in such a way as to create long-term, sustainable jobs for Australians and in such manner as to provide for the sustenance of long-term, family-based communities throughout regional Australia.

Australian Voice believes that all associated road, rail and port infrastructure should be co-ordinated to ensure orderly development and so as not to impede or unnecessarily encroach upon the rights of other property holders or existing communities.