End of mining boom hits Australia hard
Way back in May – a whole five months ago – the Honourable Wayne Swan MP, Deputy Prime Minister and Treasurer of the Commonwealth of Australia was full of confidence.
Delivering his budget for 2012-13, after 21 years of continuous growth and four years of budget surpluses he felt cock-a-hoop. “In an uncertain and fast-changing world, we walk tall – as a nation confidently living within its means,” he said.
His budget was going to “to share the tremendous benefits of the mining boom with more Australians”. His message couldn’t have been more reassuring:
Tonight we make a forceful statement that ours is one of the world’s strongest economies and fairest communities. Not even a sovereign debt crisis in Europe or unprecedented natural disasters here at home could deny Australia this substantial achievement. The deficit years of the global recession are behind us. The surplus years are here.
And now? In October? It’s over.
Swan’s confidence derived from the Australian mining boom, itself the product of a 10-year credit-funded commodities “super-cycle” that saw demand and prices soaring to unprecedented levels. Most of the demand came from China’s resurgent economy.
China’s steel production grew to seven times more than the UK and the US combined, and accounts for nearly half of global output. The country’s share of global imports of iron ore, a crucial ingredient, has increased from less than 10% in the early 1990s to about 65% now.
But China’s annual growth rate has been slowing consistently. Now it’s down to 7.4% and there’s nothing to stop it dropping like a stone. In response to slowing demand from China, prices of commodities such as iron ore, copper and coal have fallen dramatically this year.
This is already having an impact on the economies of Australia, Brazil, Indonesia, parts of Africa and other exporters.
Since the start of July, the price of iron ore, Australia’s most valuable export, has fallen by more than a third to $87 a tonne, while the price of thermal coal at $100 a tonne is just above a two-year low.
As a result, mining companies are scaling back their expansion plans in Australia. This month, BHP Billiton, the world’s biggest mining company by market value, shelved Australian projects worth more than A$30bn, blaming weak commodity prices and rising costs.
Ric Deverell of Credit Suisse says the prices of iron ore and other commodities could fall in the long run below their current levels. “The ingredients are building for a train wreck. I think [iron ore prices] are more likely to be $70 in 2015 than $150.”
Guess which figure Swan used to make his budget forecasts? Now he’s working out how to minimise a looming budget deficit and like everyone else, the Australians are staring austerity in the face.
The impact of China’s slowing economy doesn’t just affect Australia’s mining industry. It reverberates around the world. Loudly.
Maybe it was the trigger that persuaded the International Monetary Fund to launch its emergency Chinese lantern into the stratosphere in August. The Chicago Plan Revisited examines claims that, by eliminating fractional reserve banking you could, according to one commentator, “eliminate the net public debt of the US at a stroke, and by implication do the same for Britain, Germany, Italy, or Japan.”
Dream on. The proposal didn’t fly in the 1930s, and it won’t fly now.
Why? Because the key to the global crisis for the defenders of capital lies not in eliminating debt in the financial system – which does indeed have serious problems to contend with – but in the real economy where the slump is unstoppable.
The contraction of the global economy has a momentum all of its own, driven on by the surplus of capacity and commodities created by the credit-induced boom. Sure, the financial system needs total reconstruction. So does the economy because production for profit is ultimately destructive. Sleight-of-hand tricks like those coming out of the IMF belong in the fantasy world of magic, however.
23 October 2012