Exporting to Asia; Australia’s future in the region.

A Recent Example

Dr John Edwards, Economist and RBA board member, in his seminal work “Beyond the Boom” describes, correctly, that the defining characteristics of the first decade of Australia’s mining boom (2003–2013) were primarily about prices, iron ore and China. The boom also had flow on effects to coking coal, copper and other metals. In essence, a populous country in command of a vast high growth economy was in demand of a commodity, that Australia was well placed to provide.

How will China Influence our Export Market in the Future?

As Dr Michael Fullilove recently observed in the 2015 Boyer Lectures, China is looking to reorientate its economy away from investment and towards consumption. Realistically then, we are unlikely to see Chinese demand for iron ore increase in any meaningful way. The recent rallies we’ve seen in iron ore prices can be attributed to increased Chinese imports after the closure of their domestic iron operations due to the availability of cheap foreign ore. This has analysts predicting a short term and artificial rise in prices. Importantly, while the demand for iron ore remains steady, Chinese domestic steel consumption remains low. This is driving producers to offload their product onto the global market and further drive down the price of steel while demand remains tepid. What we should expect to see is demand for iron ore to stabilise with low to moderate growth over the coming years.

Energising Asia with LNG and Coal

While the demand for iron ore has waned, Australia is well placed to help secure Asia’s energy security. The Reserve Bank of Australia (RBA) predicts the need for Liquid Natural Gas (LNG) across the region will grow steadily in the coming years with Japan and China absorbing the bulk of our exports. South Korea, India and Taiwan are also expected to increase demand as they look to supplement or replace their coal fired power generation. Currently, Australia is the 4th largest producer of LNG globally and RBA predictions would see it become the largest global producer by 2018. But Australia’s market share is not likely to go unchallenged. As China moves away from coal and looks to secure its long-term energy future in cleaner power production, we face competition from Russia. Dr Matthew Sussex from the Lowy Institute identifies Russia’s ambition to increase its sphere of influence towards Asia as manifesting itself through new competitive energy and infrastructure contracts. In order to secure long term contracts with the Chinese, Russia would be willing to sell at loss in order to secure a direct pipeline through its eastern territories. Such a move would potentially lock Australia out of the Chinese market and act as a challenge to Australian contracts, not just in China, but also across North East and Central Asia. Australia’s LNG aspirations are also strongly linked to the price of oil. Currently the Organization of the Petroleum Exporting Companies (OPEC) has shown itself unable to come to an agreement on production reductions and with the reintroduction of Iran as an oil exporter, prices look set to remain low and keep the price of LNG depressed.

Despite this long-term trend towards cleaner energy, the International Energy Association predicts that the demand for coal in developing South East Asian nations will continue to rise. Australia will need to overcome its domestic hurdles to ensure it has the capacity to meet Asia’s future demands. Keeping operations financially viable in the face of the current downturn and holding off increasing challenges to its social licence to operate (see Adani’s Carmichael coal mine and Hunter Valley examples) are two such hurdles.

Multilateral Policy and Legislation

The recently signed Trans-Pacific Partnership offers some positives for Australian resource exporters. As the liberalising effects of the agreement come into affect, the changes should see competitiveness increase with regulations preventing governments unfairly advantaging state owned enterprises through financial support and, in addition, provide an equalization of the bidding process for foreign investors. This is especially important at a time when the Department of Foreign Affairs and Trade identifies these areas as threats to Australia’s energy security.

India and Australia’s Nuclear Potential

Aside from its challenges to LNG, an increased Russian influence will provide opportunity for Australia in other markets. Russian contracts to build 20+ nuclear reactors in India open up the potential to build upon Australia’s current uranium export agreements. Should South Australia expand its Uranium industry, it has the potential to meet the roles of both supplier and waste disposal agent for a growing nuclear industry. A royal commission report due out this year will outline what role South Australia might play in a nuclear industry and represents a major milestone in the debate around for an expanded Australian Nuclear industry. It is also important to note that while India will continue to be an important customer for the Australian resource industry it is not likely to follow the same trajectory as China did 20 years ago. Economist Saul Eslake points out that while the Indian working class are younger and outnumber their Chinese counterparts, it lags behind in education, health and equality. These issues coupled with structural problems in the country’s finances and physical infrastructures make it clear that India is not placed to replicate the Chinese experience.

The Bottom Line

Asia might be the economic engine of world growth, but Australia’s role as a supplier of energy and resources is under considerable threat. We should not expect to see the likes of a Chinese driven mining boom again. Instead, Australia should be preparing for slow, but sustained growth across its energy export sector. In addition, it needs to be ready for the emergence of new players into markets Australia has traditionally enjoyed regional dominance in.