Saturday, July 3, 2010

Boom for miners but torture for others, long price boom on way - survey

THE tax on mining comes at the right time. Australia's market economists believe we are facing a boom in commodity prices that could last a decade or more and put pressure on other sectors by keeping the dollar high.

The Age survey, taken this week, finds most of Australia's financial houses expect the commodity price boom to become entrenched and continue long into the future.

Most also expect that the long boom for miners will be a long torture for other trade-exposed sectors such as manufacturing, agriculture, tourism and even education. But most also argue against government intervention to help them.

The panel of 19 economists was asked if it shared the view of Treasury and the Reserve Bank that Australia's mineral prices will remain high for decades, and, if so, what will that mean for the long-term level of the Australian dollar, and for other trade-exposed industries such as manufacturing, agriculture and tourism.

A clear majority broadly agreed that commodity prices have entered a long boom. They might come off their peaks, but global supply of iron ore and coal is thought unlikely to grow fast enough to close the gap with demand, driven by the industrialisation of China and India.

Commonwealth Bank's Michael Workman said conditions before the global financial crisis were ideal for mining investment, but even then, there was far too little of it to close the gap. And, he warned, "the next 10 years are likely to be a period of constrained global liquidity, which will be adverse for debt-based mining exploration and development".

ANZ chief economist Warren Hogan said commodity price cycles typically last for 30 or 40 years, and this one has just begun. "We do not expect commodity price levels to revert to the 'bear market' levels seen in the 1980s and '90s for at least another 10 to 20 years," he said.

But some disagreed. Richard Gibbs of Macquarie Bank pointed to the scale of Chinese investment in the mining sectors of Africa and Latin America.

"Ultimately, this will provide the scope for the introduction of competing supply of key minerals", he said.

NAB chief economist Alan Oster and BIS Shrapnel's Richard Robinson also warned that future technological breakthroughs in prices of solar energy and other renewable fuels could sharply reduce the value of Australia's coal and gas.

But what would this mean for the dollar? The consensus was that it will remain high, relative to the past, when over the two decades to 2005 it averaged US70. Only two forecasters put a number on it. CBA estimates it will average US80 over the next decade. Westpac's Bill Evans is more bullish, saying the combination of high commodity rises and Australia's interest rate differential will keep it around an average of US90.

What will that mean for manufacturing and other trade-exposed sectors? "Hollowing out," said Mr Robinson of BIS Shrapnel. "Large tradeable parts of manufacturing will become uncompetitive. Tourism and agriculture will also suffer."

And add higher education to that, warned Monash University's Jakob Madsen: "It is starting to look cheaper to take an education in the UK than in Australia." But while there was a strong consensus that other trade-exposed sectors would suffer if the dollar stays high for decades, few supported government intervention to offset it.

"This is the way resources get diverted to our most successful sector, to take advantage of the commodity price boom," wrote BT's Chris Caton.

Australian Industry Group chief executive Heather Ridout warned the high dollar will create "a major challenge" for business and government. She urged accelerated economic reforms.