For many years, Australians have been wary of the Chinese dragon to our north. Sometimes, unfortunately, those concerns were unattractive examples of base xenophobia and racism, other times worries about the spread of communism.
In other cases it was the reasonable, if unlikely, scenario planning done by defence and other agencies should China’s mood turn aggressive (or any other countries, for that matter).
Across the board, though, these concerns have been based on an actively hostile China, one acting with intent. Now, it seems, the risk from the Chinese dragon is not that it will breathe too hot and too far, but not hot enough.
From the sheep to the dragon
For most people, the story of our relationship with China has been rooted in the past. But, as many Australians are only now beginning to realise, if our 19th century success was achieved riding on the sheep’s back, the economic prosperity of the late 20th and early 21st centuries was a result of riding on that dragon.
And it’s a steel dragon. In 2006, according to the federal department of industry, Australia exported 247,000 kilotonnes (kt) of iron ore, the main ingredient in steel. China’s demand of 129,000 kt was just a touch over half of that volume – an uncomfortably sizeable chunk. By 2013, our exports of the red dirt had risen some 130 per cent to 579,000 kt. And China’s stake? It was now 441,000 kt – more than 80 per cent higher than our entire export volumes just seven years earlier.
The kicker is that three out of every four tonnes of coal we exported was now being sent to power China’s rapid industrialisation. On one hand, that’s a stunning success. Australian miners had captured a huge and growing market, and had capitalised – briefly filling shareholders’ pockets and state and federal government coffers alike.
Of course, the problem with exporting iron ore is that you only have to build each building once. So while that rapid industrialisation was a boon while it was advancing, there’s no iron-clad (excuse the pun) rule that says China must take a growing amount of it each year.
Building for a boom, but facing a bust
That hasn’t stopped our miners – large and small alike – rushing to increase volumes, just as China’s forecast economic growth falls and its demand for iron ore starts to stabilise.
Australia’s mining industry has boomed over the past 20 years, and has taken our economy with it. That’s meant a huge build-up in mining capacity and mining employment. What’s good for China has been good for us. But there are increasing signs that China’s growth is slowing – including the Chinese government’s downgrading of growth expectation and interest rate cuts there, designed to stimulate economic activity.
Those are clear signs of an economy that is still growing, but which is finding growth tougher to come by. And for Australia, when that gusty tailwind dies away, many mining workers will be surplus to requirements – something we’re already seeing reflected in our unemployment numbers and the fast-dwindling contracts for our mining services companies that provide planning, staffing and equipment for mine development and expansion.
The risk for the Australian economy is that the source of our multi-decade boom becomes the catalyst for a bust, or if not an actual bust, then a period of slower and more difficult economic growth.
Just as the boom meant more mine workers, more spending and higher economic growth, a lull (or worse) will mean fewer workers in our mines, and less money being spent by mining companies – and will be a significant drag on the economy.
The Chinese building industry feels a long way away and hardly relevant to Australian consumers and investors. But just as it was invisibly responsible for our economic boom, it remains the largest and blackest cloud on our economic horizon.
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Scott Phillips is a Motley Fool investment adviser. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).
The Sidney Morning Herald