But the nation also is yet to understand the policy changes required to facilitate the unprecedented investment in new capacity, concludes a report commissioned by ANZ Bank from consulting firm Port Jackson Partners.
The report provides one of the clearest frameworks yet for understanding the two-speed economy squeeze on sectors such as manufacturing from the mining boom’s high dollar.
It firmly rejects deliberately slowing down the mining boom fast lane. And it suggests that a “new era of economic reform” is needed to maximise the resource boom opportunities and to ease the pressures on the slow-lane industries.
But these policy changes have to be generated by opportunity rather than by crisis as they were in the 1980s. “The leadership in this economy is struggling to capture that vision,” ANZ chief economist Warren Hogan told The Australian yesterday.
“The good news,” says the Port Jackson Partners report, “is that the prize is so big, and the potential benefits so widespread, that Australia has every reason to embrace the opportunities.
“Unlike past episodes of growth, this will be long-lasting, dependent on technology and high-end skill sets and has the potential to deliver decades of economic prosperity.”
The report’s “base case” predicts a surge in Australian mining, energy and farm commodity exports from $210 billion to more than $480bn in today’s dollars over the next two decades, even allowing for significant falls in commodity prices.
“Market prices are signalling one of the great needs of our time — to provide the relatively poor of the world with the raw materials to move beyond subsistence and poverty,” says the report, prepared by Port Jackson Partners director Angus Taylor.
Led by liquefied natural gas, this would lift the commodities export sector from about 10 per cent of the Australian economy before the China boom to nearly 20 per cent by 2030.
This base case assumes that Australia mostly maintains its share of global commodities markets after the current huge pipeline of resource projects is complete. Further increasing Australia’s market share above this base case could lift commodity exports to $566bn.
But even the base case requires a massive investment in production capacity: an estimated $1.8 trillion of commodity-related investment over the next two decades. This is equal to nearly 50 per cent of the economy’s existing capital stock across all industries.
The report suggests that such a transformation will not happen without a much sharper national focus on increasing the size of our skilled workforce; tapping foreign capital, including Chinese ownership of mines and farms; reversing our productivity slump and applying new research and development, particularly in agriculture; and accelerating planning and water access approvals for mine and farm development.
The Port Jackson Partners report deals with common reservations about Australia’s mining boom opportunities:
* Rather than ending soon like most booms, the rising Asian demand for mining and agricultural commodities will last for decades, it argues.
* Even though Australia is blessed with mining and agricultural resources, it will lose out to competing suppliers unless it upgrades its efforts. So business as normal will have high costs.
* The benefits from rising commodity exports will spread more broadly than commonly thought.
* Australia can reduce the “Dutch disease” risks of crowding out sectors such as manufacturing by expanding the economy’s overall capacity and making it more flexible.
Rather than dumbing down the economy, Australia’s resources boom is already starting to build knowledge-based clusters of commodity service companies, in line with the early 1990s analysis of American economist Michael Porter.
The report estimates that businesses that operate fully or partially in commodities and supporting services already account for nearly 70 per cent of the Australian stockmarket’s capitalisation and nearly 50 per cent of revenues.
It notes that 17 of the top 150 ASX-listed companies have substantial mining service operations, including Orica, Incitec Pivot, Worley Parsons and Leighton Holdings. Thirty directly operate in commodities in Australia and offshore.
The Australian business of service and supply companies could expand to $200bn by 2030, which would double commodity-based full-time jobs to 1.5 million.
The report suggests that the most intense first wave of commodity export investment will peak by 2013, generating sharper two-speed adjustment pressures from a dollar that ANZ’s Mr Hogan suggests could rise to $US1.25.
“We haven’t seen anything yet,” he said. “The mining investment boom is just getting going. The feeling of winners and losers, the feeling of structural change in this economy, the great bulk of it is ahead of us and the pressure that puts on certain parts of the economy is still ahead of us.”
But trying to resist these pressures would mean missing decades of prosperity.
“By contrast, if Australia does not capture this opportunity, the combination of falling prices in key commodity markets and declining investment in Australia will significantly impact Australia’s economic prospects over the medium to long term,” warns the Jackson Partners report.