RBA's thoughts on the Mining Boom

Resource Hotspot 283

Earlier this week RBA Deputy Governor Ric Battellino delivered a speech titled “Mining Booms and the Australian Economy” to the Sydney Institute.

The speech attempted to place context of the current China mining boom with four previous major mining booms which have been important forces shaping the Australian economy. The major booms are:

the 1850s gold rush;
the late 19th century mineral boom;
the 1960s/early 1970s mineral and energy boom;
the late 1970s/early 1980s energy boom; and
the current episode, which is again both a mineral and energy boom.

In relation to the current boom the RBA characterises the surge in mining investment that is currently under way as being very broad based across a range of resources, but centred on large expansion in the iron ore, coal and gas industries. Obviously, the key driver is demand for resources by emerging economies, with China being the most significant.

The RBA regards the start of this boom being around 2005, and by 2007 and early 2008, it was severely testing the productive capacity and flexibility of the economy. There was a pause in the second half of 2008, as the effects of the mining boom were offset by the impact of the global financial crisis. However, it noted that “now that this has passed, the underlying dynamics of the resource boom are starting to re-appear.”

It also notes key differences from earlier booms as follows:

First, mining investment as a share of GDP has been significantly higher than recorded in previous booms and is thought likely to rise further. In terms of additions to output, the contribution of mining this time has been larger than that during the booms of the 1960s and 1970s, but still below that of the late 19th century and much lower than that in the 1850s.
Second, the terms of trade have risen much more than they did in earlier mining booms. The current level of the terms of trade rivals the sharp peaks that were associated with rises in wool prices following the First World War and during the Korean War. The current mining boom has seen both the volume and the price of resource exports rise strongly.
Third, this is the first boom during which the exchange rate has been floating, and in which a significant rise in the nominal exchange rate has been an important part of the economic adjustment. This has added an important degree of flexibility to the economy, by allowing the real exchange rate to rise through a means other than inflation.

In considering how long the current boom may last, the RBA made the following interesting observations:

“Past booms do not seem to have lasted more than about 15 years before resource depletion, or international or domestic developments, acted to slow economic activity and bring the boom to an end. On this occasion, the growth potential of countries such as China and India suggests that the expansion in resource demand could continue for an extended period, though this will depend at least to some extent on the economic management skills of the authorities in these countries, not to mention our own.”