Miners expand capacity on price peak

Western Australia has all the ingredients the rest of the world wants and is willing to pay for.

This has been the recipe for the success of the state, which is showing up its counterparts in every domestic economic indicator from house prices to state final demand.

Do we think it can last? Here at ANZ, yes we do.

The reasons for WA’s strong conditions are primarily related to strong global growth and the commodity price boom.

Although we see the world economy slowing slightly, the rate of growth is expected to remain above its long-term average of around 4 per cent, at least through 2006 and 2007.

Also, although we think commodity prices may have peaked, firms will continue to expand their capacity to take advantage of the boom that has taken prices beyond most miners’ wildest dreams.

Importantly for WA, our growth forecasts are based on the rapid industrialisation of the resource-hungry developing nations, rather than further strong growth in the developed world.

We expect the emerging economies to grow between 6.5 per cent and 7.5 per cent in the next two years, reflecting the structural change from agricultural to manufacturing production.

The developed economies are expected to grow at a more modest 2 to 3 per cent pace.

China, which took 10.6 per cent of Australia’s exports and was our second most important export destination in 2005, is expected to grow by between 8.5 per cent and 10.5 per cent over the next couple of years.

This country’s appetite for WA’s exports is extraordinary. In 2005, China took $5.7 billion worth of Australia’s iron ore, up from $2.5 billion in 2004, and most of it was from WA.

The improvement between 2004 and 2005 was almost enough to pay for Australia’s entire household electrical goods import bill for the same year.

Most of the gains in iron ore receipts reflected the 70 per cent rise in iron ore prices in the 2005-06 Japanese fiscal year.

The volume of total exports from WA actually fell 2.2 per cent in the year to the June quarter 2006.

But with miners busy expanding their capacity to take advantage of iron ore and other commodity price rises, we expect the volume impact to correct and become a major stimulus for the state’s future fortunes.

The amount of work in the pipeline has grown dramatically, as projects such as the North West Shelf venture’s LNG expansion  take shape.

The value of engineering work done in WA grew by a massive 48 per cent in the year to March 2006, but there is still another $8.5 billion of work planned.

This is three and half times the amount of work done in the March quarter.

Inevitably, the increase in supply will lower prices for commodities, but we expect there to be some offset in higher shipments.

For the people of WA the prosperous economic conditions are creating plentiful job opportunities and good wage outcomes.

WA’s unemployment rate was 3.6 per cent in August, compared to an average of 4.7 per cent in the rest of the country.

WA’s wages grew 5.1 per cent in the year to the June quarter, compared to an average of 3.9 per cent in the other states.

Just about the only bad news for WA is they have to share their spoils.

Opportunistic new migrants both from interstate and overseas are looking for a piece of the action.

As the RBA‘s former Governor Ian Macfarlane said in a recent testimony: “I notice that now people are coming directly into WA at a much greater rate than they have in the past.”

This helps explain why WA’s jobless rate, although lower than the rest of the country. wasn’t dramatically different, while growth in state final demand was so strong. 

At 14 per cent in the year to the June quarter, WA’s state final demand was double its nearest rival, Queensland.

As WA’s population has swelled, demand has risen strongly while unemployment has remained relatively stable, because there has been enough jobs to go around.

A side effect of strong net migration has been the strong house price growth in Perth.

In the year to June quarter, Perth’s established house prices grew by an extraordinary 35.4 per cent, more than making up for the bubble that Perth largely missed in 2003.

The second closest capital was Darwin, where growth was 18.7 per cent.

However, we don’t expect this to last.

Construction of new homes has picked up dramatically in Perth and we think it will swamp underlying demand over the next three years.

• Cherelle Murphy is a markets economist at ANZ Investment Bank.