Frank Gelber, chief economist and director, BIS Shrapnel: We realised that mining investment was too high and it was going to fall. I know we sat there waiting for years for it to fall. And it wasn’t just the fall in the commodity prices that did it; long before the collapse in commodity prices, we’d been forecasting falls in mining investment as we finished off the major round of projects that was going on. We’ve added substantially to our capacity to produce enough to keep on increasing production for some time.
We’re just getting the gas projects coming on stream from Queensland. Then, of course, why did commodity prices collapse? Because supply caught up to demand – not only here, but also offshore. And remember, it was a very narrow boom. Hopefully this is the last time I have to talk about mining, because mining has been dead for a long time.
Let’s not wait for the next mining boom. We’ve got plenty of supply. People are worried about China – well, demand is not collapsing out of China, it is increasing out of China.
The mining boom, or the investment part of it, is over and we’ve known that for a long time. Now, with the collapse in commodity prices – well, you wouldn’t expect a really big rebound in commodity prices because now there are plenty of producers that the Chinese can screw down on price at around about current price levels. And when you see Fortescue in the papers recently cutting their costs of production, I think to myself, ‘well, hang on, that means the pricing can go lower’. This is an argument we had to have because they’re the marginal producer in this environment. And so all of the little producers, the high-cost ones, they’re dead. They will gradually go broke – well, maybe not so gradually.
So, we all know the mining investment phase is over. We speak as though [the decline is] finished, but it’s only just beginning. We’re 12 per cent into a 60 per cent decline in mining investment. And that’s assuming that the next round of North-West Shelf gas projects proceeds towards the end of the decade, and at these prices they won’t. So there’s a downside risk to that.
The first thing… [is to] understand that it’s going to take a long time for falling mining investment to bottom, and we have to absorb the negative shock to growth of falling mining investment.
Anyone who expects this to be quick is misleading themselves. We were talking before about how Turnbull’s problem is everybody expects him to come out and fix it – well, he can’t. There’s no magic wand; it’s going to take time for this to work its way through the system.
The housing boom has been a big contributor to growth, but we’re looking at effectively the next stages of plateauing of house building or residential building, followed by a moderate decline. It won’t be a collapse or anything like that, although some markets might collapse, and so it’s important to understand which is which.
At the end of the day, in terms of the macro effect, the housing cycle is just running its course, and we’re all waiting for non-mining business investment. It’s easy to say, ‘oh well, confidence is going to improve that’; well, confidence won’t improve it. Confidence is all about the election of Turnbull and a sigh of relief that we’ve got rid of Abbott.
AUDIENCE QUESTION: Should we toast that now?
FG: So will companies go out and invest now? No, they won’t. They might have the confidence in the short term – honeymoons are short-lived usually – but at the end of the day, and this is a longer one than most, since the GFC the non-mining part of the economy has been weak.
Take out the banks and it’s been particularly weak. The banks have been the strongest of the lot and demand has been weak, profits have been weak and investment has been weak, and so now we’re waiting for this magical increase in non-mining business investment. Excuse me, where is it going to come from?
There’s still plenty of capacity in the system, and it’s going to need a rise in demand and profitability to underwrite the financial feasibility of investment. Firms don’t invest just because ‘it’s a nice time and we feel good’.
There’s a huge structural change going on in the economy. So the strong industries of the future are not the ones that are strong in the recent past. It’s going to be totally different. What does that mean for people is the real question.
For anybody working in this economy, it is one that is changing dramatically and you can’t use old rules and think, ‘we’ve been down and we’ll pick up’. This is not the sort of economy that works that way. The only thing that a government sensibly can do in this environment is try to understand how they can facilitate the growth of industries when they come through [and] start to look forward to the next round of growth.
AUDIENCE QUESTION: How important do you think the Turnbull factor has been? Business leaders almost immediately talked about a rise in confidence after he became Prime Minister.
FG: We feel a lot better, but we’re not investing any more. My point is that won’t make people invest; it might make them comfortable about investing when it’s right for their business to invest. You can prevent investment with uncertainty and lack of confidence, but you can’t actually push a business to invest.
Richard Robinson, associate director, economics, BIS Shrapnel: There was every chance it was going to be a one-term government, which we haven’t seen since maybe the 1940s. Basically, business would’ve started to get more and more nervous. Now Turnbull has got to actually put some runs on the board in terms of policy and then business… but as Frank said, it’s got to come back to the fundamentals being right.
AUDIENCE QUESTION: What is the most resilient industry?
FG: Tourism – it’s the strongest, it’s the one that’s come back the earliest. It’s the one that has been in recession for such a long time. We closed down half of our tourism facilities in Queensland up and down the coast – the ones that were still there we didn’t do any work on and so they had no money, and they ran down. To get tourists back, they’ve got to upgrade, fix them up, renovate, and then expand. Open all the old ones that we’ve closed down. This is going to be a boom industry over the next five to 10 years provided the dollar stays low and so it suits me down to the ground to have low commodity prices because the miners have had their day and we lived high off the mining boom, but we forgot that we were paying an incredible price in the rest of Australia’s industries.
Now we’re paying a price for the structural shift back towards the structure we had before the mining boom came. And there’s a big transition cost. We’re not going to have a recession like Canada is or Brazil, but we’re going to have weak growth through the impact of declining mining investment and start to see the other industries coming through again.
In Australia, this is a really short-term period of huge change. In three years’ time we’ll be back to balanced growth and we would have forgotten all about it.
AUDIENCE QUESTION: Is the ageing population having any influence?
FG: Absolutely. That’s a different problem though. So this is a cyclical and structural problem and we’ve got big cycles going on everywhere. [It’s a] structural problem in that we changed the structure of the economy – not deliberately, that’s the way capitalism works – when the mining boom was on and now we’ve got to change back. Again, that’s the way capitalism works. And there’s a transition period and a transition cost, so you could talk about it and it doesn’t sound very much, but the reality is it’s enormous.
AUDIENCE QUESTION: You mentioned that mining is dead for a long time and that people shouldn’t be waiting for the next mining boom. What does that mean for property investors out in those regions?
FG: The technical term is they’re stuffed for a long time, but you always knew that they would be. The point is, in those mining regions, you need a lot less people to run production phase than the construction phase and so everyone came in for the period of construction and investment, and they’ve all gone. They’re all going or gone.
AUDIENCE QUESTION: So if you made a lot of money out there in the boom times what is next for those people?
FG: It’s also a case of buyer beware – they should’ve been more careful when they went in. They went in with dollars in their eyes and now they have sand in their eyes.
RR: The fly-in and fly-out is not good for the local communities, and all of the state governments know this.
FG: They’ve priced the locals out of the market, they couldn’t live there anymore. Cut your losses and run – it’s not going to come back real quick, there’s nothing they can do. We used to talk to people in WA when they were talking about whether they should allow the building of houses in those mining times, and the debate was, should it all be demountable and taken away at the end of it like the Olympic Games, for example. That made a lot of sense and they were trying to do that, but the pressure on them was enormous and in the end they built too much. Some of the housing is demountable and to the extent that they can get rid of it that takes away the oversupply, but just wander around NSW to some of the old gold towns. There’s an awful lot of houses there.
RR: With one of those they tried to put a nuclear waste dump on it.
FG: Well, they might as well – there’s nobody there.
