China is one of Australia’s largest trading partners, and with the completion of a free trade agreement between the two countries last year, the economic relationship is only set to deepen in the coming decades.
However, economic news out of the Asian nation in recent months has not been as positive. Evidence of a substantial slowdown in economic activity has many analysts worried about the broader impact on other countries in the region – including Australia.
While a slowdown would be bad for the mining industry in this country, might this also be a good time to take a step back and look at switching to different areas, reallocating company resources and investing in new mining equipment?
How bad is the economic slowdown in China?
For the past decade and a half, China has been able to maintain almost double-digit GDP growth year after year. Australia has been a major beneficiary of this, particularly in the mining sector.
China has looked to Australia for its imports of coal, iron ore and the many other minerals it needs to industrialise a nation of 1.4 billion people. However, over the next decade selling minerals to China is going to be a lot harder to maintain.
The Chinese government is still a powerful force within the economy and since a change in leadership two years ago, investment priorities have shifted. China is moving from building new infrastructure to developing its service industries and boosting consumption.
The International Monetary Fund (IMF) is already forecasting GDP growth to fall to an average of 7 per cent per year. This will mean a substantial decrease in demand for Australian mineral exports that go into producing steel, concrete and other building material for the construction industry in China.
What impact will it have on the mining sector in Australia?
Last year the price of iron ore crashed to just $50 a tonnes on the world’s commodity markets and this has hurt the mining sector in Australia. The crash was attributed to a fall in demand from China and the large expansion of new mining operations flooding the market with unwanted minerals.
There are predictions of a recovery in the medium term, however in the meantime, Australian mining companies look set for a tough few years as demand recovers and the issue of oversupply diminishes. Because the mining industry as a whole is so dependent on China as an export market, companies must look to new economies to sell extracted minerals.
The slowdown will have a more widespread impact on the economy than just mining companies. The government of Western Australia is already feeling the financial pressure from a dramatic reduction in mining royalties because of falling prices and demand.
No one should be under any illusions of how central the Chinese economy is to the resource-rich states of Australia. According to the WA budget papers released in May, government revenue, which grew by 8.7 per cent in 2013-14, fell by 3.3 per cent last year with a further 2.7 per cent decline expected this year.
How should mining companies prepare for the tougher times ahead?
Australian mining is quickly adjusting to the new economic conditions by decreasing capacity and putting off new projects. This may only be temporary as growth is expected to return to the industry soon.
Now might be the time for investment. Perhaps even to change the business model of mining companies to avoid dependence on a single market for a single product. Mining companies might want to start looking at buying new instruments or mining equipment repairs as demand and need to use them falls over the coming months.
A slowdown in China may be the opportunity mining companies need to re-think their business and make improvements. Servicing instrumentation in mining can be complicated at the best of times, but a decrease in capacity might be a chance to fix any equipment not in use while the industry looks to shift its focus to other markets.
Seeing the opportunities of slowdown may result in benefits in the future when mining rebounds as one of Australia’s fastest growing industries.