Could a new mining boom be on the cards for Australia?

Australia has experienced several episodes of mining booms in its economy. Australia has a history of mining booms dating back to 1850s gold rush to the current episode of both mineral and energy boom. Australian economy is currently experiencing a surge in mining activity, one of a sequence of mining booms since the European settlement of Australia. These have been a powerful force in shaping the Australian economy. New analysis shows Australia’s mining industry is experiencing conditions like the boom of 2010, with record-breaking exploration spending and capital raising. Total exploration expenditure hit a record $974 million in the fourth quarter of 2021, almost double the exploration spending in the same period in 2020. Total capital raising also broke a record in the quarter, increasing more than 70% to $3.17 billion compared to 2020. The figures come from analysis of cashflow reports of 733 resource companies by independent research agency Austex. In this article, Global Road Technology goes down memory lane to figure out if a new mining boom could be on the cards for Australia. 

Mining Booms in Australia.

The distinguishing features of a mining boom are significant increases in mining investment or mining output, usually both, which goes on to have important macroeconomic consequences. There also have been several other mini booms, but the major ones are worth deliberating on given what is being experienced in Australia currently. In the past two hundred years or so there have been five major mining booms: 

• the 1850s gold rush
• the late 19th century mineral boom
• the 1960s/early 1970s mineral and energy boom
• the late 1970s/early 1980s energy boom
• the 2010 mineral and energy boom

The 1850s gold rush

The 1850s gold rush was the first major mining boom in Australia. Economic historians note that the timing of these gold discoveries may have been related to international developments such as the California gold rush of the late 1840s, which had heightened general interest in gold exploration and mining. The first well-publicized find of gold in Australia, near Bathurst in New South Wales, was by a veteran of the California gold rush. Domestic economic developments may also have influenced the timing, as the continuing effects of the 1840s recession meant that labor in Australia was abundant and mobile, and therefore more likely to become involved in prospecting. 

The boom ended up being mainly centered on the gold fields of Victoria. This boom was different from later booms as it wasn’t accompanied by a large increase in mining investment as large amounts of capital weren’t readily available. Besides, the type of mining was well suited to large inputs of labor and little input of capital. Measured in terms of value added to GDP, this boom greatly exceeded all subsequent mining booms. At its peak in 1852 mining comprised about 35% of GDP. This created tremendous upheavals in the economy at the time. The value of exports from NSW and Victoria rose by a factor of six in three years, and exports of gold exceeded wool exports for the following 18 years. 

The late 19th century mineral boom

The second boom was in the late 19th century. This boom was driven by the discovery and development of new gold and metal mines across the country, but particularly in Western Australia, Queensland and western New South Wales. Partly this was the natural consequence of the spread of the population to more remote areas, but it also reflected capital market developments. There was ample capital available in London to fund exploration activities as the recession in the early 1890s had led to a fall in investment opportunities. Also, the development of the ‘no-liability’ company made it much easier to access capital. In 1894, 94 Western Australian companies had been floated in London, two years later they were 690. 

The main part of this boom took place against a very subdued economic background, both in Australia and in major economies. The financial collapses that occurred after the bursting of the 1880s property bubble had led to a global depression with very large falls in output and high unemployment. The current account, which had moved to a very large deficit during the 1880s property bubble about 13% of GDP moved back to a more normal small deficit in the 1890s, and eventually into surplus when the mining boom ended, and the economy slowed in the early 1900s. The inter-regional effects of the boom, as in the 1850s were very powerful. There were strong flows of labor to the new mine sites.  

The 1960s/early 1970s mineral and energy boom

The 3rd boom was that in the 1960s/early 1970s. This boom was quite broadly based, but the key parts were sharp increases in mining of coal and iron ore, and the development of oil and bauxite discoveries. The background to this boom was that both the global and domestic economies were becoming increasingly stretched, with rising commodity prices and rising inflation more generally. Particularly important for Australia during this period was the economic development of Japan. As well as adding to the global demand for resources, this had particular significance for Australia because Japan’s proximity lowered transport costs and made certain mineral discoveries economically viable. 

This boom differed from the episodes in the 19th century in that it was more capital intensive. Partly this reflected supply factors, as global capital markets had developed significantly since the turn of the century. Partly it was also technological, as some of the resources could only be developed with large-scale investment. Mining investment rose from 0.5% GDP in 1960 to a peak of almost 3% in the early 1970s. Export prices rose strongly, particularly in the early 1970s, resulting in a large swing in income towards exporters. The current account of the balance of payment moved to surplus, an outcome that has not been repeated since. Employment grew strongly in the second half of the 1960s, by close to 3% per annum due to large-scale immigration and increased female participation. Wages rose strongly, and the centralized wage fixing system spread the increases widely through the community. 

The late 1970s/early 1980s energy boom

The fourth major boom in the late 1970s/early 1980s. This boom was largely driven by the energy sector, in particular steaming coal, oil and gas. This followed the second of the oil price shocks in the late 1970s. In addition, the increased cost of energy made Australia an attractive place for energy-intensive activities such as aluminium smelting. Investment in mining started to pick up in the late 1970s and increased sharply in 1981 and 1982. The mining boom led to a sense of euphoria about Australia’s future which was accompanied by a resurgence of wage demands and rising inflation. Monetary and fiscal policies were tightened but failed in keeping the economy in check. 

The exchange rate system at that time involved management of the Australian dollar against a trade-weighted index of currencies. The authorities followed a policy of appreciating the exchange rate, but, with the benefit of hindsight, the rate of appreciation was relatively mild and did little to insulate the Australian economy from rising inflationary pressures. The boom was relatively short-lived. The downturn in the global economy in 1981, following the oil price shock, meant that demand for energy ended up being much less than had been expected, this was reflected in both the volume and the prices of exports. At the same time, the distortions caused by high wage growth and inflation, and the resulting tight policies, meant that by 1982/83 the domestic economy had followed the global economy into a severe recession. 

The 2010 mineral and energy boom.

This boom was characterized by the surge in mining investment, which was very broad-based across a range of resources, but the core part centers on the large expansion of the iron ore, coal and gas industries. It was, to a large degree, driven by demand for resources by emerging economies, with China being the most significant.  Based on the pattern in mining investment and commodity prices, the start of this boom can be dated from around 2005. By 2007 and early 2008, it was severely testing the productive capacity and flexibility of the economy. That all changed in the second half of 2008, as the effects of the mining boom were offset by the impact of the global financial crisis. However, when it passed, the underlying dynamics of the resource boom started reappearing. 

The key differences to other booms and those worth noting included:

• Mining investment as a share of GDP was significantly higher than recorded in previous booms and the trend was forecasted for an upward trajectory. In terms of additions of output, the contribution of mining in this boom was 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.
• The terms of trade rose much more than they did in the earlier booms. The level of the terms of trade rivaled the sharp peaks that were associated with rises in wool prices following the First World War and during the Korean War. The 2010 mining boom saw both the volume and the price of resource exports rise strongly.
• The 2010 boom was the first boom during which the exchange rate was floating, and in which a significant rise in the nominal exchange rate was an important part of the economic adjustment. This added an important degree of flexibility to the economy, by allowing the real exchange rate to rise through a means other than inflation.

Could a new mining boom be on the cards for Australia?

Increased capital inflow caused by the rapid rise of commodity prices is bound to strengthen the Australian dollar. The mining industry has experienced a sustained period of substantial growth due to pandemic positive exploration that has seen record-breaking capital raising and expenditure. Investors are betting the world’s accelerating push away from fossil fuels to clean energy will drive a boom in demand for a range of materials such as copper and lithium, opening the door to lucrative new economic opportunities in Australia. Globally, Australian ranks among the top-three countries by share of known reserves for copper, cobalt, lithium and nickel. However, lessons should be learnt from previous boom and bust events which have left companies and communities grappling with what to do about closed and abandoned mining sites.