Mining Industry at Center of Australian Election

Mining Industry at Center of Australian Election

Investors with exposure to resource extraction and related industries in Asia should watch the upcoming Australian parliamentary elections as they will impact the shape of the region’s economy.

Australia was notably the only developed country to avoid recession during the economic crisis. Since 2007 it has maintained positive GDP growth. A decade ago, 70% of the country’s exports went to the U.S., U.K. and Japan. When the crisis hit the rest of the world, Australia switched much of its export market to China. China wanted access to Australia’s wealth of natural resources, especially iron ore. Thus began the mining boom that has defined the country’s political economy in recent years.

Today mining comprises about 5.6% of Australia’s GDP and 30% of its exports. The resource extraction sector represents 20% of market capitalization on the Australian Stock Exchange. The sector is dominated by large multinationals like BHP Billipton, Rio Tinto and Chinese Shenhua. Despite being such a large part of the economy, mining only represents about 2.2% of the labor force, following a global trend of growth without employment. The composition of the economy has changed dramatically, leading some to question if it is healthy for growth to be so heavily weighted to one sector and one export market.

The mining boom has created what some refer to as Australia’s “two-track” economy. While resource extraction sectors have surged, their exports have caused the Australian dollar to appreciate substantially in value. The appreciated currency value has damaged the competitiveness of other export industries in Australia. For example, Holden, one of Australia’s biggest car makers recently cut 500 jobs in Adelaide because it is no longer competitive to produce there.

To address this imbalance, in July 2012 the Labor government introduced the Minerals Resource Rent Tax (MRRT). MRRT was designed as a 40% tax on resource extraction industry profits over 6% of their capital investment. The proceeds of the tax were intended to fund development projects and tax breaks in sectors of the economy, mainly in South Australia, that were damaged by the mining boom. However, a budget report last week reported that the tax raised only $800 million, half of what was anticipated.

This is in part due to weakening demand for resources in a slowing Chinese economy, but also because of currency appreciation. Furthermore, Australia’s overall growth forecast was downgraded by a quarter of a percent, exacerbating the country’s budgetary problems.

With a parliamentary election coming in the fall of 2013, the future of the MRRT has become a central campaign issue. The Labor Party, under Julia Gillard who is facing reelection, would like to keep the MRRT in place despite the projected budgetary problems. The Green Party, with an environmental focus in mind, has proposed a reform of the mining tax to increase revenues in order to meet the liabilities it was designed to cover. Finally, the opposition Liberal Party, with the backing of the mining industry, has proposed scrapping the MRRT altogether. The outcome of this election will play a major role in determining the structure of Australia’s economy.

About Author

Michael Madoff

Michael works in Washington, DC as an information technology consultant focused on the public sector. He graduated cum laude from Georgetown University's School of Foreign Service with a degree in International Politics. Michael is primarily interested in the impact of emerging technologies on political and economic interactions.