Some eight years ago, the 'Resources Boom' race began. It had no defined parameters but numerous competitors lined up. The first leg was the price boom, peaking in 2011. The second runner, the investment boom, overlapped with the first, lasted about six years, was worth $400 billion worth of resources projects and saw business investment spending peak in the last quarter of 2012 (with 19 per cent of gross domestic product). But now, in May 2015, we're in the early stages of the third phase, the production boom.
Ross Gittins, economics editor of the SMH, described what we can expect from the third leg of the 'super-cycle' resources boom:
We're well aware that resource prices are still falling from their 2011 peak and that mining investment spending is rapidly coming to an end. But, according to Mark Cully, the chief economist of the federal Department of Industry and Science, the production boom is set to last far longer than the others did.
Illustration: Glen Le Lievre
This commodity cycle is being driven more by a longer-term change in the structure of the global economy than by the usual shorter-term cyclical mismatch between supply and demand.
Many people see the resources boom as caused by the rapid development of China, whose economy is now growing more slowly. But Cully sees China as just the first act, with other countries to follow.
"Economic growth in the highly populated emerging economies of Asia will continue to be a defining theme of this century," he says.
Per-person consumption of energy and materials in most countries in Asia lags the developed nations by a large margin and so is almost certain to grow. As incomes rise and they attract infrastructure and commercial investment, Asia's consumption of resources will grow by volumes that far outweigh whatever's happening in the rich countries.
Iron ore and coking coal are used to make steel, of course. Cully says China's steel production is estimated to have reached a record last year. He expects it to fall in the short term but, over the medium term, to reach a new peak almost 10 per cent higher by 2020.
"This will be required for China to continue expanding its infrastructure networks, especially rail, build more housing and grow its capital stock," he says.
Then there's India. Its Ministry of Steel wants present production to be four times higher by 2025. It may not achieve that target, but this still suggests rapid growth.
There've been highly publicised falls in the world price of iron ore in recent times, but Cully expects it to remain low this year and next before rebounding over the medium term as higher-cost producers exit the market and demand continues to grow. Australia has some high-cost producers, but most are in other countries, leaving Rio Tinto and BHP Billiton as the world's lowest-cost producers.
Turning to steaming coal, Cully questions the environmentalists' optimistic belief that world demand for it is on the way out. More than 300 gigawatt (one billion watts) of coal-fired electricity generation capacity is being constructed or has been approved in developing countries.
"Barring major policy adjustments," he expects coal-fired power to remain a primary source of generation in China and India. Japan, South Korea and Taiwan are increasing their use of steaming coal, while Indonesia, Malaysia, Vietnam and Thailand are increasing by even more.
Australia is likely to play an important role in meeting this increased demand because our coal's higher energy content makes it more suitable for use in advanced generators. Cully expects our exports to have increased by 15 per cent by 2020, making us the world's largest exporter of steaming coal.
Finally, natural gas. Cully's team projects that our exports of natural gas will increase more than threefold to about 75 million tonnes a year in 2019-20. By that time Australia would be the world's largest exporter of gas.
The increased volume of gas exports is likely to be the principal driver of growth in Australia's export revenue. Looking across all the mineral commodities, increases in the volume (quantity) of exports is expected to outweigh further decreases in prices, so that the value of these exports (price times quantity) increases by about a third through to 2019-20.
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