What if, suddenly, we were out of the woods?
Quietly, the mining industry has just doubled the price of coking coal. Instead of getting $US81 per tonne as it did back in March, for the next three months it'll get $US200 per tonne from Japan, the most in four years. And Japan has reason to be grateful. The so-called spot price has surged even higher, to $US213 per tonne.
If it stays there, or even near there, a good chunk of Scott Morrison's budget problems will have vanished, just as they vanished for Peter Costello during the mining boom at the start of the century.
The Committee for the Economic Development of Australia believes Morrison needs to boost the budget by $17 billion per year if he is to get the deficit down to zero by the end of the decade. After a quarter-century of economic growth, that's probably where it should be, if not in surplus.
To date he's shown himself to be incapable of much at all. The much-vaunted "omnibus savings bill" he has just got through the Senate saves $6 billion over four years. It's done it largely at the expense of payments directed to women (family tax benefits and the baby bonus) and students. But at the same time he's got through the Senate $4 billion of high-end tax cuts (which will benefit men more than women because they are twice as likely to earn high incomes).
The net effect on the budget won't be much. It'll be improved if his superannuation tax hikes get through the Senate, and harmed if his company tax cuts get through.
The explosion in the price of coking coal could deliver much more. Access Economics says for every $US1 the price rockets, the budget deficit will improve $65 million. Multiply that by the number of dollars the price has rocketed and you get a boost of $7 billion per year if the new price holds. And that's just for coking coal. The iron ore price is up 40 per cent this year. The price of thermal coal (the stuff that makes electricity) is up 55 per cent. It's not bad for an industry that had been shutting mines and laying off workers.
As is often the case, it's China that's been doing it for us. Part of it is an uptick in residential construction. Apartments need steel, which is made from coking coal and iron ore. The other part is a bureaucratic decision of the kind at which China excels. The central government believed the local authorities were mining too much coal (of both kinds) running up losses in order to chase volume. Rather than require them to turn a profit as Australia would have, it instructed them to cut their hours of operation. In April it forced all of its mines to cut their number of working days from 330 to 276.
Suddenly, Chinese furnaces started needing more foreign coking coal. The world's best is in Queensland's Bowen Basin. Mines that had been shut down quickly reopened. Mines that had been barely profitable suddenly started earning enough to pay tax.
If the price is sustained it'll do more than boost Morrison's budget. HSBC thinks it'll boost nominal GDP by 2 per cent. Nominal GDP is the best measure of the dollar value of wages and profits combined. And because the price will also push up the dollar, the buying power of those dollars will grow. There will be much less need to cut interest rates, most probably letting new Reserve Bank governor Philip Lowe off the hook.
Moody's reported on Wednesday that it expects Australia to become the world's fastest growing AAA-rated commodity exporter, beating Canada, Norway and New Zealand. It's not likely to take away the AAA rating any time soon.
Anyone who doubts that the benefits of that growth will spread should check out research the Reserve Bank conducted a few years back on the effect of the two mining booms at the start of this century. Running a computer simulation to work out what would have happened had those booms not happened it found >they lifted real per capita household income by 13 per cent, raised real wages by 6 per cent and cut the unemployment rate by 1.25 percentage points.
Some of us did worse than others. Renters suffered while homeowners prospered. Workers in import-competing industries did less well than workers in industries that serviced mining.
The booms transformed Australia, and more than fixed the budget, without our leaders needing to do a thing.
This time it'll be less spectacular, principally because China can take away what China gives. In September it began loosening its restrictions on mining, allowing 74 mines to operate more days per year. And the rest of the world is in a better position to respond to Chinese demands for resources than it was last time. Our latest brand-new mini-boom might last no more than months, but it's painted a picture of how quickly things can change.In The Age and Sydney Morning Herald