Is Australia Entering a China-Driven 20-Year Resources Boom? (Part 2 of 2)

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Researched by Industrial Info Resources (Sugar Land, Texas)--A senior executive of the extremely conservative Reserve Bank of Australia recently predicted that Australia was entering a 20-year resources boom led by Australian exports to China. The first part of this article showed that, while China is extremely important in regard to investments in Australia's mining sector, the real money for investment in new, large industrial projects--66% of it, in fact--was actually part of LNG projects in which China's primarily coal-fired industrial base plays only a minor role.

This second part will examine whether Australia is genuinely entering, as in commencing, a 20-year boom or whether the country has, in fact, been in boom conditions for some years and is simply emerging from a bit of a glitch in long-term overall growth.

The global financial crisis wasn't really a crisis at all in the Australian resources sector. Yes, there was a downturn, and unfortunately jobs were lost, but the effects of the slowdown were limited and short in duration.

The late 1990s and early 2000s were very quiet times in the Australian resources industry. Commodity prices were low--so low that iron ore mining companies would simply shut down production when a problem occurred, rather than spend money on repairs and maintenance. There were no major LNG projects under way: Woodside's (ASX:WPL) (Perth, Australia) fourth train in North West Australia had recently been completed, and no other LNG projects were on the horizon.

The situation was so dire for the construction industry in Western Australia that every major contracting company closed down. This, in turn, led to the disappearance of skilled labour. The welders, riggers, scaffolders, engineers, project managers, schedulers, planners, document controllers and others left the state or left the moved into different industries.

About 2003, the situation began improving. Demand for commodities was on the rise, and prices began increasing. The major miners began considering the expansion of their production capacities, and significant projects were planned. By 2005, things were in full swing. BHP Billiton (NYSE:BHP) (Melbourne, Australia) had mapped out rapid-growth projects aimed at doubling the company's production output. Likewise, Rio Tinto plc (NYSE:RTP) (London, England) publicly stated that the company intended to double its output of ship-borne iron ore. The $50 billion Gorgon LNG project was in the late feasibility stage, and the question seemed to be not whether the project should proceed, but how many production trains should be built. However, all this frenetic activity resulted in prices skyrocketing, a short supply of labour, and wages' going through the roof. The resources boom was well and truly in town...and so it continued until late 2008, when the global financial crisis arrived Down Under.

The global financial crisis was the talk of the country, the talk of the world. In the Australian resources industry, all paused to look--the better to observe what might happen. Unfortunately for Rio Tinto, the arrival of the economic slowdown coincided with the company's purchase of Alcan and its $10 billion debt. Rio Tinto didn't pause; the miner stopped dead in its tracks. All projects--and there were billions of dollars worth--were put on indefinite hold. Major EPC firms were disengaged, which subsequently terminated their subcontractors. The domino effect was textbook, but was primarily limited to Rio Tinto's projects.

A hundred meters or so up St Georges Terrace, Perth's main street and the local other big resource players such as BHP Billiton, Woodside and Chevron Corporation (NYSE:CVX) (San Ramon, California), the story was significantly different. Although these companies did pause for a few months to assess the situation, they did not stop in their metaphorical tracks. A very similar story to this also unfolded in Queensland, Australia's other major resource-led economy. The foremost resource in Queensland is coal that is primarily exported to Asia for steelmaking. Rio Tinto has assets in this region also, and again expansion plans were stopped. For other companies, it was back to business after pausing to assess the situation. For most, it really was a case of "Crisis? What crisis?"

Australia is enjoying what seems to be an extended period of very high-level activity in the resources sector--a boom, if you must call it that. However, the country is not beginning to enter this upswing. The boom actually started about seven years ago, although a recent glitch in the boom was caused by the global financial slowdown. Fortunately, for most of Australia and the greater part of the resources industry, the slowdown was a temporary and short-lived slow down and, for the most part, appears to have passed. There will very likely be another one or two of these blips in the radar before this "boom" runs its course. Quite simply, a boom that runs without a hiccup for 20 straight years would not be a boom at all--it would be a miracle.

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy related markets. For more than 26 years, Industrial Info has provided plant and project spending opportunity databases, market forecasts, high resolution maps, and daily industry news.