Australia’s Economic Growth Relies on Asia’s Resource Demand

Introduction

The Australian economy is largely based on the mining industry and other raw materials, with Asia being a key market. As regards the issue of whether the country’s economic growth relies on Asia’s continuing demand for resources, this is an issue that warrants further exploration. In this paper, the views of various writers on what they see as Australia’s dependence on demand for resources from Asia. Also, how the Australian economy can respond to either a contraction or growth in Asian demand has been examined. Two Australian companies listed on the ASX 200 shall also be selected and their contribution to the Australian economy through exports examined. Finally, the writer shall describe how one of the aforementioned organizations is looking to the future to expand its exports into Asia.

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Literature Review

Increased dependence of China on the Australian mining industry

In his article which appeared in Time Magazine, Schuman (2011) rightly referred to Australia as China’s mining pit. Australia is blessed with numerous mineral deposits such as iron ore. The country is currently riding high on a construction and mining boom in Asia, and particularly in China where most of the country’s mineral exports are destined. Although the mineral economic boom has helped to improve the Australian economy by contributing to the country’s export revenues and creating local jobs, on the other hand, Schuman (2011) contends that the boom has also hurt many local industries. A strong Australian dollar has seen the cost of even the most basic of commodities as food go up. However, the demand for raw materials such as iron ore

has kept the Australian economy afloat even as other major currencies of the world were hugely affected by the global financial crisis. As Schuman (2011) reports, over the past decades, nearly 12 % of the country’s GDP has been as a result of trade with China, and this share is expected to increase to about 35% in the next decade. The mining industry has benefitted the most from China’s yearning for raw materials, according to Schuman (2011).

Australian mining boom hurting other sectors of the economy

Critchlow and Curran (2011) report that the mining boom in Australia’s mining industry has seen other sectors of the economy suffer as they have not grown in tandem with the rapid growth of the mining industry. This is a real concern for the various sectors of the economy especially small businesses that are fearful of the negative economic ramifications should China stop buying raw materials from Australia’s mining industry.

As the Australian dollar continues to appreciate against other major world currencies there is a high chance that the cost of most commodities will go up. According to Clitchlow and Curran (2011), should the Australian economy rely too much on the mining industry, this might weaken the economy, effectively resulting in a recession. Clitchlow and Curran (2011) further note that the Australian mining industry contributes towards 7% of the country’s economy, representing an almost 100% increase since 2000.

China a key player in Australia’s economy

In their article titled, ‘when China sneezes, does Australia need to catch a cold”, Laurenceson and Tang (2009) point out that most of the macroeconomic dialogue in Australia centers on the economic fortunes gotten through the country’s link with China? Currently, Australia’s exports to China are two and a half times more in comparison with the country’s exports to the US (Laurenceson & Tang 2009). As China continues to rely on Australia as its leading import market, its business cycle has also been synchronized with that of Australia. Booms shall see the volume of exports from Australia increase, and there shall also be a resultant increase in resource prices (Laurenceson & Tang 2009), while a slowdown in China’s exports shall result in stagnant, negative, or modest growth in export volumes.

Ways that the Australian economy can respond to either growth or contraction in Asian demand

Economic diversification

Whereas it is expected that the demand for commodities by the Asian market and especially China shall decline at some point in favor of the production and consumption of services, a country like Australia need not suffer (Das 2012). The country should develop a systematic shift from dependence on the mining industry to the service industry that is likely to grow in demand in developing Asian countries like China and India. Some of the service industries that would benefit from such a move are tourism and education. Australia could also take comfort in the knowledge that incomes in Asia are yet to reach those of a developed nation. When incomes in Asia increase, this would undoubtedly benefit Australia the most, owing to its geographic proximity.

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At the start of the global financial crisis, there was a reported significant surge in export demand from Australia. The Australian government is already committed to a record fiscal expansion but should there be a contraction to this demand especially from China, it could spell doom for the Australian economy. One way through which the Australian government can deal with this issue is by instituting industrial reforms that not only foster growth in modern sector output and employment but also reduces the costs of mainly state-owned sectors.

As China’s export demand subsidies, this shall result in significant losses in both employment and output in the short run. The inward shift for fiscal expansion demand is bound to increase oligopoly rents. However, the Australian government can respond to the accelerating or a continuing slowdown in China’s economy and its consequent effect on Australia’s exports by further price cap regulation and privatization in sectors of the economy that are largely dominated by mainly state-owned oligopoly firms (New & Shael 2011). Such a move would result in real exchange rate depreciation, thereby enabling continued growth in both modern sector employment and output.

How Australian companies are adding to the Australian economy through exporting resources

Contribution of BHP Billiton Ltd on Australia’ economy through exporting resources

One of the Australian companies listed on the Australian Securities Exchange (ASX) that has contributed significantly to the country’s economy by exporting resources is BHP Billiton Ltd, a company that is mainly involved in the exploration, production, development, and processing of minerals. It has also ventured into gas and oil exploration, production, and development. The main commodities that the company deals with include metallurgical ore, iron ore, copper, aluminum, and energy coal, among others. The company reported a 0.7 % increase in revenue in the 2011/2012 fiscal year to the US $ 72,226 million in comparison with the previous fiscal year (BHP Billiton Limited 2012).

Petroleum products were the leading export commodity at the US $ 12,937 million. This represents a 20.5 % growth in comparison with the previous fiscal year. Other export commodities that did well for the company include aluminum (the US $ 4,766 million) and base metals (the US $ 11,596 million).

Contribution of the Anglo Gold Ashanti Company on Australia’ economy

Another company listed on the ASX that has contributed to the Australian economy through exploring resources is Anglo Gold Ashanti, a company that is mainly involved in gold mining (AngloGold Ashanti Limited 2013). Some of the by-products that the company deals with include uranium oxide, silver, and sulfuric acid. in 2009, gold income for Anglo Gold Ashanti amounted to US $ 3,768 million out of total revenue of US $ 3,961 million.

How Anglo Gold Ashanti is looking to the future to expand its exports into Asia

The increased demand for gas in the Asian market, coupled with the collapse of gas prices in the US has prompted BHP Billiton Ltd to consider shipping part of the shale gas reserves meant for the US market into the Asian market where there is growing demand. Seeing that the cost of operating LNG projects in Australia has increased sharply in recent years, this would appear to be a very attractive move for the company (Business Spector 2012). This way, the company hopes to both grow a new and promising market even as it seeks to remain competitive.

Conclusion

The construction and manufacturing boom in Asia has been a key pillar of the Australian economy, with its mining industry benefiting the most. However, this boom will not last forever and as China and other Asian countries prepare for a slowdown in their economic growth, this is bound to hurt the Australian economy. One way of dealing with the negative ramifications of such an economic slowdown is for the country to develop a systematic shift from depending on the mining industry to other sectors of the economy such as tourism and education. The Australian government can also implement price cap regulation, as well as by privatizing sectors of the economy that are largely dominated by state-owned oligopoly firms.

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Reference List

AngloGold Ashanti Limited 2013. AngloGold Ashanti. Web.

BHP Billiton Limited 2012. Businesses. Web.

Business Spector 2012. BHP considers exporting US shale gas to Asia. Web.

Clitchlow, A & Curran, E 2011. Australia’s mining boom covers troubles elsewhere. Web.

Das, S 2012,’Risk management: a vulnerable state- the economic outlook for Australia’, Keeping Good Companies, Vol. 64 No. 1, pp. 15-19.

Laurenceson, J & Tang, K K 2009. When China sneezes, does Australia need to catch a cold?. Web.

New, R & Shael, T 2011,’Energy and minerals overview’, Agricultural Commodities, Vol. 18 No. 2, pp. 85-90.

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Plumb, M, Kent, C & Bishop, J 2012. Implications for the Australian economy of strong growth in Asia. Web.

Schuman, M 2011. China’s mining pit. Web.

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