Resource World Magazine

62 www.resourceworld.com o c t o b e r / n o v e m b e r 2 0 1 5 e p i l o g u e D a v i d D u v a l P robably no other country has been impacted by the best and the worst of the recent commodities boom like Australia. Both Canada and Australia com- pete in the same markets; however, for certain commodities (including iron ore and coal) Australian production greatly exceeds that of Canada. As a result, the economic impact in Australia from the recent down- turn has arguably been much worse. When iron ore and other mineral com- modities were reaching record highs, the Australian dollar was trading almost at par with its US dollar counterpart. At time of writing the "Aussie" was trading at $1.44 to the US dollar – a shadow of its former self. High oil prices had a similar effect on the Canadian dollar which trades a bit stronger against the greenback. The commodities boom drove employ- ment and wages not only in Australia's mining industry but throughout the broader economy. Geology and engineer- ing graduates with next to no experience were commanding six figure salaries right out of university. Housing prices in smaller mining communities and in major urban centres, many of which acted as supply hubs for the minerals industry, soared to record levels, making that market one of the most expensive in the world. While mining boomed, the coun- try's export industry suffered, given the strength of the Australian dollar. The nation's auto industry, centered in South Australia, which hardly benefited from the mining boom, has been particu- larly affected. General Motors recently announced plans to close its Holden fac- tory near Adelaide where one in three are out of work. South Australia now has the highest unemployment rate in the county and, according to a recent Bloomberg story, has become a rustbelt that is "staring into the abyss." It is desperately seeking alternative industrial development including nuclear waste storage. (Two-thirds of the state sits on an ancient crater that is up to 3.3 billion years old which would presumably make it a suitable repository for such waste). Canada's economy has not yet seen the extremes that Australia has faced, although recent economic data indicates an economy that is at least in a "technical recession". Nonetheless, Scotiabank predicts that elevated infrastructure commitments from Ottawa and the majority of the provinces will help sustain Canada's growth this year and next. The weakness in both the Canadian and Australian currencies has served to increase the local dollar returns in both countries for commodities priced in US dol- lars – a two-edged sword at best. Canada's economic decline has been largely related to the drop in oil prices and its impact on oil sands producers which are among the highest cost in the industry. Producers of coal, copper, nickel, potash, uranium and other commodities have also suffered, forc- ing them to focus on reducing costs. Gold miners in particular have made consider- able progress in the area. Competitive currency devaluations have likely served to increase the volume of industrial commodities coming into the marketplace, especially for iron ore. Major iron ore producers including BHP, Rio Tinto and Vale have in fact expanded low-cost output to boost sales volumes and cut costs, exacerbating the global supply- demand imbalance. Copper producers have also adopted this strategy. According to a recent Goldman Sachs analysis in Bloomberg, "Australian ship- ments will expand to 785 million tons in 2016 from 764 million tons this year, while Brazilian exports will rise to 411 million tons from 367 million tons. Global iron ore demand will shrink 1.3% this year, before expanding 1.1% in 2016." In Canada, oil sands production is expected to climb by 500,000 barrels per day by 2017, increasing the glut on international markets. (No matter what the oil price, you just don't shut down a multi-billion dollar oil sands project mid- way through construction!) In addition, with the removal of sanctions on Iran, substantial new oil supplies will likely hit the marketplace by year-end. Most ana- lysts believe that the complex nature of Middle-East politics will preclude a quick resolution to the oversupply situation abet- ted by OPEC members. Taking mines offline might seem like a good way to deal with surpluses in the mar- ketplace. However, this is generally a lot more difficult than it would seem. Mines are fearful of losing skilled technical and trades people; union contracts can make shutdowns very costly; other mines have non-cancellable contracts for energy even if shut-down. The political consequences of shutting down mines – particularly in resource dependent emerging market econ- omies – can potentially be catastrophic. Although existing demand for key industrial commodities remains weak, one should never forget the ability of China's economic engine to absorb surpluses in the marketplace. In 2008-09 China announced a US $586 million stimulus package that focused on infrastructure and housing, cre- ating strong demand for metals. Something like this would appear to be the best hope for a near term recovery in commodities markets. n Lower commodity prices slow resourced-based economies – Canada and Australia feel the pinch

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