23/02/2010 - 15:42

Mining to double, boom beyond 15yrs: RBA

23/02/2010 - 15:42

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The central bank says Australia is experiencing a surge in mining activity driven by commodities demand from China and India that could last more than 15 years and expects the mining industry to double in size over the next few years.

The central bank says Australia is experiencing a surge in mining activity driven by commodities demand from China and India that could last more than 15 years and expects the mining industry to double in size over the next few years.

Reserve Bank of Australia deputy governor Ric Battellino said the nation was better placed to deal with the economic challenges than in previous resources booms, when a fixed exchange rate hampered trade flows and threatened inflation.

The RBA also expects the size of the mining industry to double over the next few years in an effort to satisfy Asia's vast appetite for energy and resources.

In a speech to the Sydney Institute on Tuesday, Mr Battellino said the current boom began in 2005 and was interrupted somewhat by the global financial crisis before resuming its course and was now attracting strong investment.

"This is again very broad based across a range of resources, but the core part centres on the large expansion in the iron ore, coal and gas industries," Mr Battellino said in the speech entitled `Mining booms and the Australian economy'.

"It has been, to a large degree, driven by demand for resources by emerging economies, with China being the most significant."

Mr Battellino said the mining sector would expand over the next few years to be twice as big as in the previous boom that ended with the global financial crisis.

"I don't think it's unreasonable to expect mining investment to rise to 6 per cent of GDP (gross domestic product) over the next few years," Mr Battellino said.

"'That would be about twice as high as it was up to in the previous boom. It's a very big boom."

Mr Battellino said the RBA had done a lot of work through its representative office in Western Australia to assess the north west gas fields.

"I have to say it's a very big story," he said.

As the underlying dynamics of the resource boom start to re-appear, many of its characteristics are similar to the previous four booms - the 1850s gold rush, the late 19th century mineral boom, the 1960s and early 1970s mineral and energy boom, and the late 1970s and early 1980s energy boom.

But there are a few key differences, particularly for Australia's gross domestic product (GDP) and terms of trade.

"Mining investment as a share of GDP has been significantly higher than recorded in previous booms and is thought likely to rise further," Mr Battellino.

"In terms of additions to output, the contribution of mining this time has been larger than that during the booms of the 1960s and 1970s, but still below that of the late 19th century and much lower than that in the 1850s."

With the passing of the global crisis, Australia must now guard against upward pressure on inflation, which has accompanied previous booms.

But this boom is the first during which the Australian dollar exchange rate has been a floating, rather than fixed, rate, and in which there had already been a significant rise in the nominal exchange rate.

"This has added an important degree of flexibility to the economy, by allowing the real exchange rate to rise through a means other than inflation," Mr Battellino said.

Mr Battellino was uncertain about how long the current boom would last, but said past booms had lasted around 15 years.

"On this occasion, the growth potential of countries such as China and India suggests that the expansion in resource demand could continue for an extended period, though this will depend at least to some extent on the economic management skills of the authorities in these countries, not to mention our own," he said.

Significantly, global events were a key part of causing mining booms in Australia, while the overall impact of each boom was to strengthen the economy.

He said the current level of the nation's terms of trade rivalled sharp peaks associated with rises in wool prices after the First World War and during the Korean War.

"The current mining boom has seen both the volume and the price of resource exports rise strongly," he said.

History had shown inflationary pressures caused by booms had been difficult to deal with, but this boom would be different.

In the 30 years since the previous boom, the Australian economy had developed in ways that should make it better able to accommodate the surge in mining activity.

"The floating exchange rate is a key difference, but goods and labour markets are also more flexible, and the monetary and fiscal policy frameworks are now more soundly based," Mr Battellino said.

"This gives grounds for confidence that we can do better this time, but the task will not be without challenges."

Mr Battellino said the Australian dollar would continue to strengthen on the back of the mining boom.

"Fundamentally, if the scenario works out the way people think, with all this investment, particularly in the gas industries, there's going to be a huge demand for investment in Australia and a huge demand on resources which can only be accommodated by a higher exchange rate," Mr Battellino said.

"My guess is in trend terms the exchange rate will continue to rise."

He also said inflation was still coming down.

"We had that period from the very start of 2005 when inflation started to pick up and by 2007, 2008 inflation pressures here were hitting.

"Nowhere near to the standards we got during the previous mining boom, at that stage we were already into double digits."

Mr Battellino said the mining booms had a very powerful effect on the economy as there would not be a lot of room for consumer spending or house building during the next mining boom.

"That's the reality of the situation. There's only so much activity that can take place and if we want to have all this mining investment and mining output, which is happening, then basically the other part of the economy, for the moment will have to be restrained somehow," Mr Battellino said.

"You can't do all these things simultaneously."

Asked how the restraint would be carried out Mr Battellino said "through interest rate policy".

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