Commodities crash could turn Australia into a new Greece

The commodities boom made Australia the lucky country but rising debt and a slump in Chinese demand for resources signal tough times ahead Down Under

Last month Gina Rinehart, Australia’s richest woman and matriarch of Perth’s Hancock mining dynasty delivered an unwelcome shock to her workers in Western Australia: accept a possible 10pc pay cut or face the risk of future redundancies.

Ms Rinehart, whose family have accumulated vast wealth from iron ore mining, has seen her fortune dwindle since commodity prices began their inexorable slide last year. The Australian mining mogul has seen her estimated wealth collapse to around $11bn (£7bn) from a fortune that was thought to be worth around $30bn just three years ago.

This colossal collapse in wealth is symptomatic of the wider economic problem now facing Australia, which for years has been known as the lucky country due to its preponderance in natural resources such as iron ore, coal and gold. During the boom years of the so-called commodities “super cycle” when China couldn’t buy enough of everything that Australia dug out of the ground, the country’s economy resembled oil-rich Saudi Arabia.

While the rest of the world suffered from the aftermath of the global financial crisis, Australia’s economy – closely tied to China – appeared impervious, with full employment and a healthy trade surplus.

However, a collapse in iron ore and coal prices coupled with the impact of large international mining companies slashing investment has exposed Australia’s true vulnerability. Just like Saudi Arabia, which is now burning its foreign reserves to compensate for falling oil prices, Australia faces a collapse in export revenue.

Recently revised figures for April show that the country’s trade deficit with the rest of the world ballooned to a record A$4.14bn (£2bn). That gap between the value of exports and imports is expected to increase as the value of Australia’s most important resources reaches new multi-year lows. Iron ore is now trading at around $50 per tonne, compared with a peak of around $180 per tonne achieved in 2011. Thermal coal has also suffered heavy losses, now trading at around $60 per tonne compared with around $150 per tonne four years ago.

For an economy which in 2012 depended on resources for 65pc of its total trade in goods and services these dramatic falls in prices are almost impossible to absorb without inflicting wider damage. The drop in foreign currency earnings has seen Australia forced to borrow more in order to maintain government spending.

The respected Australian economist Stephen Koukoulas recently wrote of the dangers that escalating levels of foreign debt could present for future generations. Could a prolonged period of depressed commodity prices even turn Australia into Asia’s version of Greece, with China being its banker of last resort instead of the European Union.

Stephen Koukoulas
✔
@TheKouk

AUD tapping the mat at 0.7360… International investors running away faster than you can say "economic management".
6:20 AM - 16 Jul 2015 · Rome, Lazio, Italia

Mr Koukoulas points out that by the end of the first quarter this year, Australia’s net foreign debt had climbed to a record $955bn, equal to almost 60pc of gross domestic product. Although this is far behind the likes of Greece, which boasts an unenviable ratio of over 175pc, it is nevertheless unsustainable, especially if it is allowed to widen further.

The government in Canberra and the Reserve Bank of Australia had bet that depreciation in the value of the country’s currency would help to offset the decline in its overbearing mining industry. However, that hasn’t happened to the extent they would have wished. Although recent surveys of business confidence have been encouraging, outside mining the economy appears hopelessly weighted to the only other area of significant growth, real estate.



Warren Hogan @anz_warrenhogan

Aus consumers more worried about the medium term economic outlook than during the GFC #ausecon #auspol
1:51 AM - 14 Jul 2015

The problem is that Australia, after decades of effort to diversify, is looking ever more like a petrodollar economy of the Middle East, but without the vast horde of foreign currency reserves to fall back on when commodity prices fall.

Instead, Australians must borrow to maintain the standards of living that the country has become accustomed to, which even some Greeks will admit is unsustainable.

http://www.telegraph.co.uk/finance/newsbysector/industry/mining/11749706/Commodities-crash-could-turn-Australia-into-a-new-Greece.html

Now what was that I was saying the other day about permanent growth not being possible?

I didn't understand alot of that - whoosh! over my head lol, but I do have a good friend who lives in Oz and she's been saying some similar stuff via posts on FB

LOL, I think it was with Veya I was having the discussion that people have got into the frame of mind that permanent growth is sustainable. It isn't, as this shows.

Veya is a knowledgeable chap

He is. But I seem to remember him saying that Australia would always manage to continue to grow (or words to that effect) and I said it couln't, and i'm a very knowledgeable chapess lol.

sassy wrote:He is.  But I seem to remember him saying that Australia would always manage to continue to grow (or words to that effect) and I said it couln't, and i'm a very knowledgeable chapess lol.

Yes you are, I give you that.

If I don't know something I either shut up, don't comment, or make an idiot of myself lol

Had a lot of experience and do a lot of research and would like to know everything about everything, but that simply isn't possible, brains go 'I will not compute' lol

Hahahaha I don't have time always, to really research stuff

@sassy
we will IF the RW doesn't destroy us... Dumbfuck Abbott has done his best to undo any investment that would create jobs into the future from the mining boom profits. Thankfully there is still enough to keep us going but growth will slow dramatically

We actually need to stop/slow for a little bit to give us a chance to manage social inequity

We will make jobs by constantly changing not resting on our laurels like Europe has done.

And like it says the BIG problem is them giving so many concession to real estate investors that have fucked out economy in the immediate term. Unfortunately both the PM and treasurer have said they like it and hope they keep going ups since they personally profit from it.

Also of that 60 billion we can literally knock off like 15 billion by just putting back the taxes Abbott took off the ultra rich.

RW are actually the worst economists they leave the nation poorer(not just in debt but the loss of assets) but some of their friends richer as much as their dumbfuck supporters are convinced otherwise this is not good for the nation as a whole.

You could be talking about us, we have been royally fucked by the RW lately!