An Epic Mining Boom…and We Blew it

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Your editor had a rough night last night. His immune system succumbed to a devilish little kiddie bug. We were up doing the old heave ho and now feel worse for wear.

We were going to discuss Australia’s economic growth numbers, which came out yesterday. They were fairly tepid at 0.6% for the September quarter and 2.3% over the year.

But that’s measuring economic growth in terms of production volumes. When you add in the effect of changing import and export prices (i.e. the change in the terms of trade) growth fell 0.6% in the quarter and was up only 0.6% over the past 12 months. 

Falling commodity prices were only a part of the reason why the terms of trade fell. After all, the price of our most important export, iron ore, continues to defy gravity.

Import prices rose across the board, even though volumes remained flat for the quarter. In other words, the weaker currency looks like its leading to a rise in import prices, which is hurting our terms of trade and national income growth.

The Aussie fell further overnight on fears of Federal Reserve ‘tapering’. It’s trading around 90 cents. If this keeps up expect to see more weakness in the terms of trade and contracting national income next year.

In fact, it’s a case our mate Dan Denning has been making for some time now. He’s expecting Australia’s economy to contract next year. The first recession in 20 plus years.

To explain why, we’ll hand today’s Daily Reckoning over to Dan…and go back and lie down…

An Epic Boom…and We Blew it

By Dan Denning

Australia had a 10 year mining boom and forgot to get rich. Worse still…

We came out of the biggest boom in the history of the world in a WORSE financial position than when we went into it.

Here’s what I mean…

1.    We had a historic increase in national income thanks to a record terms-of-trade. Rivers of cash flowed into Australian coffers.

2.    And yet the government and households managed to pile on record amounts of debt…

In other words, we’ve come out of the boom in MORE DEBT than when we went in to it.

You might think that’s impossible, but that’s exactly what’s happened.

Check out the graph below from Melbourne’s Grattan Institute…

a
click to enlarge

The Institute reckons that between 2002 and 2012, Australia earned over $190 billion in national income, thanks to a record terms-of-trade.

Put simply, Australia got record amounts of income for selling iron ore, coal, and gold overseas. Meanwhile, the price of imports – the things you pay for – went down.

See how that works?

You get more for what you sell and you pay less for what you buy. You SHOULD get rich. But somehow, many Australians forgot to.

This river of cash lifted some prices – especially house prices.

But the government still managed to blow it.

The Grattan Institute study concludes that almost all the rise in Australia’s national income (thanks to the resources boom) was squandered with government spending and tax cuts by the Howard, Rudd and Gillard governments.

In other words, all the money we got from selling coal and iron ore to China has already been SPENT…and all we’re left with is higher personal debts and bigger government deficits.

If you’re still unconvinced, you only need to take one look at what’s happening on the ground…

•    INVESTMENT BANKS ARE GETTING OUT OF COMMODITIES

JP Morgan Chase is one of the biggest traders of oil, industrial metals, and coal on Wall Street. But in August it quit the physical commodities business altogether.

Only three years ago it bought trading house RBS Sempra Commodities for $1.6 billion. Today, they’ve written off every last cent.

•    RESOURCE-BASED BUSINESSES ARE GOING BUST

Take Andrew Howard as a typical example…

For the last 10 years his business was buying and selling jumbo-sized earthmoving equipment from his base in the northeast coast city of Mackay – home to the largest mining service centre in Australia’s richest coal country, the Bowen Basin.

At the height of the global financial crisis, Andrew travelled to the United States to buy up machinery cheap in a depressed economy…and later sold it to a resurgent Australian mining industry.

But after a decade of tracking the rise and fall of Australia’s mineral boom, he’s shut the doors of his business AFG Equipment for good.

There’s just absolutely nothing happening,‘ he says. ‘We’re just treading water.

•    BILLIONS IN INVESTMENT WRITTEN DOWN EVERY WEEK

In July, OZ Minerals took a $240 million write-down in its assets after gold and copper prices plummeted in the second quarter…

Gold producer Evolution Mining followed with a write-down of the value of its assets of $400 million for the fiscal year…

And gold miners including Newmont, Goldcorp and Newcrest had to write-down $12.6 billion against the value of their assets…

How you can you possibly go ‘back to normal’ after all this?

You can’t.

There’s no going back when you’ve blown an opportunity. All you can do is look ahead and make the best of it.

By the way, you might be surprised to know I think ‘the best’ could be very good indeed.

Despite the obvious cracks I see in the economy, I also believe it’s one of the most exciting times to be an investor in Australia.

Do the right things with your money you will do really well.

The truth is a lot of miners thought commodity prices would never fall. They invested money in projects that would only be profitable with permanently high commodity prices.

Now, reality has hit home.

So what’s likely to happen? Find out here.   

Regards,

Dan Denning+
for The Daily Reckoning Australia

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Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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3 Comments on "An Epic Mining Boom…and We Blew it"

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garry
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“and We Blew it”, alright. Years on, and it has finally dawned that we have had a succession of 3rd rate country managers running the show. Indeed they squandered every chance we had to build a viable security blanket for the 21st century.. How – well for a start they unconditionally handed more than 83% of Australia’s mineral wealth to foreign entities with never a restriction, that at least they should be committed to buying shovels from us. That is, an Australia made, shovel industry. Nope, instead the global miners bought these tools in… Indeed, imported all their needs. Consequently… Read more »
Brendan
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Giving tax cuts is not squandering. Leaving the taxes in the hands of the government — that’s squandering.

Jason
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Money blown on housing bubbles, money blown on imported consumer goods as China’s vassal state of Australia makes nothing. Money blown on imported oil as Australia reached its domestic oil peak in 2000. If fact, along with the usual socialistic waste such as negative gearing, the subservient lapdogs in parliament have also wasted billions. Our politicians and business leaders along with the spineless press have been too busy down on all fours licking China’s boots to see the boom turn to a peak. Bust is next. But Australia is a vassal state, it still licks boot and grovels before China,… Read more »
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