China And Australia

Australia has enjoyed an economic windfall from high commodity prices in the last few years. The country is a leader in the mining and mineral exports industry and demand from China has been a driving force in the industry’s growth. Factors outside of Australian control, a growth spurt in China, created the boom in the mining industry there. Now those same external factors have changed. If China’s economy goes into spasms in the near future with so much of Australia’s growth banking on that country it could lead to big problems down under.

Australia’s mining industry accounts for around 5.6% of the country’s gross domestic product. The resources boom has made the nation the one of the top exporters of Gold, Diamonds, Zinc, Aluminium, Uranium, Diamonds, Coal, Iron ore and Lead. In those last three Australia is the largest exporter with most of that demand coming from China. In the United States mining accounts for only 1.6% of the GDP a much less crucial figure. Australia mining industry formerly took its cues from Japan. As that moon waned another waxed brighter and bigger. China has been fueling the huge growth in Australia’s mining.

China is looking more and more every day like it is in line for a slow down in its economy. The country’s stock market declined around 20% in the last year and there seems to be some confusion as to the real extent of the slowdown and the magnitude of it. Already we’ve seen small signs come from China’s housing industry and its manufacturing industry which has under performed recently. If the Chinese authorities fail to understand the issue at hand or fail to stop the forces acting on it the country could be dealing with an economic crisis and a hard landing. China’s real estate bubble is teetering on the edge and the decline in the country’s stock markets is a real worry. The country, if not stalled by some intervention of God or man, may be headed for a financial crisis that could cause ill effects all over the world, playing hell with markets.

If this happens Australia will be the first country to reel from the drop off in demand. Yesterday in Sydney a group of businessmen in manufacturing whose total worth was $55 billion came out to plead with the government over the lack of attention being paid to value adding industries over commodity industries. What are they afraid of? Manufacturing now makes up 8.6% of Australian economic activity. Australian exports have seen a dramatic push from $1.6 billion to China in 1990-1 to $70.5 billion in 2010. The country has become increasingly reliant in the Chinese economy. When bubbles burst demand falls. Australian miners have not seemed to understand the coming storm. On March 21st projections from the industry said that the country would continue to produce record levels of iron ore throughout the decade. Almost all of the country’s ore goes to be turned into steel in China and used in construction there.

One thing the country can be glad for is the low number of people who are actually involved and employed in the mining industry. Only about 1.6% of the work force is actually employed there and so there will not be a huge effect on employment directly. If the fall in GDP does rattle the economy and stifle investment there will be much more trouble for Australia ahead. The fall in the commodities market will just be the first step. Once Chinese demand has fallen it will take some time for it to come back easily. Australia will have to find alternative sources of growth. Many recommend a vigorous reinvestment in manufacturing with mining profits. The government has begun a scheme like this, a 30% tax on the massive profits earned by mining companies, but it may be too little too late. There is also the problem of whether or not the money will be properly invested or used in government spending, not a boon to the manufacturing industry.

The Australian economy is over reliant on record demand from China. That country appears to be about to hit a wall in its economic growth, perhaps even entering a recession in the next couple of years. With 5.6% of the economy directly reliant on Australian demand and another part of the service industry indirectly marked a collapse in Chinese demand can not be a good thing for the Chinese economy. The Australian government appears to be trying to diversify though the mining industry itself is conservative. Almost all industries in the midst of profit booms. Australia needs to act now if it wishes to avoid its own dramatic slowdown. The diversification of its heavy industries has to happen before they’r fully exposed to China contamination.

Australia is looking at tough times ahead. Its not a time to be bullish on mining there and the country itself may be in dire economic trouble.