A quick look at one chart from the Reserve Bank of Australia’s recent chart pack confirms mining’s importance to the Australian economy.

Source: Chart Pack, Reserve Bank of Australia. Released 7 September 2022.

Over the past 30 years, contribution to national output from both manufacturing and agriculture have more than halved from a combined 20% share, to a little more than 8%.

On the other hand, mining’s contribution has increased from a little over 5% to over 11%,and has more than doubled. Financial services and insurance have also increased.

Eclipsed only by business services (and how Aussies love to consume those……..), mining is now carrying our factories and farms.

It’s a convergence of our massive natural resources endowment, technology, knowhow and people - and 20 years of massive demand from China’s mass urbanisation.

Mining’s rate of growth is due to increasing ore export volumes and commodity prices and a weakening Aussie dollar.

More recently, higher commodity price rises have resulted from COVID, Russia/Ukraine and the resulting reductions in supply those events have caused.

We can also see mining’s prominence by looking at its contribution to corporate profits in Australia over the past 20 years.

Apart from a blip during COVID, non-mining profits as a share of GDP have remained reasonably steady. Whereas, corporate profits from mining as a share of GDP have mooned from a little over 2% in the late 1990s, to just over 11% today - a compound annual growth rate of 7% per annum.

That’s impressive and almost equal to the all seasons, diversified cockroach portfolio!

Mind you, miner’s profits did peak in 2009 around the time of the GFC, and declined for around 7 years until 2016, but it has been straight up and to the right since then, at a huge clip.

Chances are that mining as a share of output is likely to continue to increase, despite China’s declining GDP growth rates and key activity indicators which are rolling over into frequent zero-COVID lockdowns.

And this……..

So why might mining output increase?

As the world starts to de-globalise and countries/trading blocs start to re-shore their supply chains, demand for Australian commodities for construction, intermediate goods and components will increase, despite longer distances and higher transport charges.

And we are already seeing the Germans buying our LNG.

Inflation is also likely as the low cost made in China/just-in-time mindset starts to give way to a just-in-case perspective, where factors of production secured from aligned political ideologues and trading partners starts to attract a premium.

Without going down that rabbit hole, I think we can safely assume that the geo-political price premium (or the Putin Premium) on commodities is likely to remain.

Mining is now a very important part of our sovereign capability.

And don’t be fooled by employment growth in the mining industry.

It’s low because it’s not people intensive, its capital intensive.

Technology will continue to disrupt physical employment in the resources sector, with more software, IIoT and automation used. But perhaps more data scientists and gamers as well!

Over the next little while as the world’s central banks seek to destroy sufficient demand to tame inflation, perhaps we all suffer.

We will also see some softening in the price action for some commodities and resource related equities. There will also be pressure to move closer to socially responsible mining.

But once the bloodletting is done, mining (and mining investment) will continue to have a very bright future.

Mike.

Australia's 30 year journey from factory to farm to quarry