Australia prepares for earlier slowdown in mining

Michael Heath and Shamim Adam Sydney

Policymakers were prepared to respond in the event the economy slowed, Reserve Bank of Australia governor Glenn Stevens said on Friday, predicting that the nation’s mining investment boom had at least another year to run before easing.

“The peak of the resource investment boom as a share of gross domestic product, the highest such peak in at least a century, will occur within the next year or two,” Stevens said in semi-annual testimony at parliament in Canberra. The central bank was ready to act if growth veered off from the outlook, he said.

BHP Billiton’s decision last week to delay approval of an estimated $33 billion (R277bn) expansion of the Olympic Dam copper, uranium and gold mine in South Australia has sparked suggestions that the resources boom that has powered economic growth is over.

A slowdown in China, Australia’s largest trading partner, may extend into a seventh consecutive quarter as a contraction in manufacturing probably deepened this month.

“With commodity prices coming off, it adds a bit more uncertainty to how quickly mining investment retraces after its peak,” said Justin Fabo, the senior economist at Australia & New Zealand Banking. “There is a bit more of a risk that the down leg of investment may be a little bit quicker than previously thought.”

A drop in resource investment may threaten Prime Minister Julia Gillard’s pledge to return the budget to surplus this fiscal year after four consecutive deficits. BHP Billiton and Rio Tinto both reported that profits had declined as commodity prices fell amid slowing global growth.

Lower earnings for mining companies may reduce the A$6.5bn (R56.7bn) the government estimates it will reap over two years from a new tax on iron ore and coal profits. The mining tax is payable when a company’s annual profit reaches A$75 million, so as not to burden smaller businesses. The government expects to raise A$3.2bn from the tax in fiscal 2015 and A$3.7bn in 2016.

“Given what has happened recently with commodity prices, the assumption the government has in the budget around Australia’s terms of trade might look a little bit optimistic but we are only two months into the financial year,” Fabo said.

The Australian dollar slid to a one-month low of NZ$1.282 against New Zealand’s dollar after Stevens said the currency would probably fall if the mining boom ended. – Bloomberg