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Mining engineering investment may be winding down, but the sector will continue to make significant contributions to the Australian economy.
A new International Monetary Fund (IMF) report said the resources boom has reached its peak, although a significant rise in exports will underpin the industry for years to come.
The IMF stated Australia’s terms of trade were at their strongest in 2011 following record high global prices for the country’s popular commodities, including coal and iron ore. Strong demand for steel in China was particularly influential.
This resulted in mining investment making up 8 per cent of Australia’s GDP in 2013, up from just 2 per cent in 2002. Coal and iron ore spearheaded the charge, but LNG projects have quickly followed suit in order to help meet global energy demand.
A shift to mining exports
While mining investment will decline over the coming years, the IMF predicted this will be offset by improvements in production as major initiatives begin to bear fruit.
“Volumes of non-rural commodity exports including coal, iron ore and LNG are projected to grow by more than 30 per cent in the next five years,” the report read.
“As a result, total mining production’s share in the economy, currently about 10 per cent of GDP, could rise by several percentage points over the next several years.”
Furthermore, Australia’s abundance of resources means deposits are well stocked for decades to come. This ensures mining will remain a structural feature of the economy in the years ahead.
What changes will this bring?
The move to export-orientated mining revenues will create new challenges for resources companies and the wider economy.
According to the IMF, terms of trade shocks will have a greater impact, although any declines will be buffered in several ways.
The organisation said: “Export volumes for most mining sector projects are relatively inelastic to modest declines in prices, given their competitively low marginal production cost.”
The floating exchange rate will also help by depreciating when terms of trade sink, which will make other tradable goods and services more attractive.
“Since the mining companies have globally distributed shareholdings, the effect on profits will be spread between Australia and abroad,” the IMF added.
Australia prepares for mining change
Australian governments are aware of the effects a shift in mining investment will have on the overall economy.
The IMF said authorities realise that even with a boost in commodity exports, the sector is likely to contribute less to national GDP. As such, Australia must facilitate mining spending, as well as aim for broader-based growth.
“Addressing infrastructure bottlenecks is a key priority,” the report said.
“Enhancing the framework for the selection and prioritisation of infrastructure projects based on rigorous cost-benefit analysis … would [also] allow for spending on infrastructure consistent with the government’s deficit reduction goals.”