“YOU’VE got to understand, the resources boom is over,” Australia’s Resources Minister Martin Ferguson told the media late last month. But is this necessarily a bad thing?

Some believe it is, and that the abrupt end of the boom that has cushioned Australia through the worst of the global financial crisis will expose inherent structural weaknesses that could see the economy heading for a hard landing.

Thanks largely to huge demand in China and elsewhere, Australia’s coal and iron ore exports have surged in recent years. Since the beginning of this year, however, the situation has changed dramatically.

China’s steel mills are reducing production in response to falling demand. As a result, the price of iron ore is about half of what it was in January last year. Coal has lost about a third of its value in the last three months.

Little wonder that BHP Billiton, the world’s biggest mining company, shelved a planned US$30 billion (S$37 billion) expansion of its Olympic Dam mine in South Australia last month. In recent weeks, other mining companies have made similar announcements.

For the Australian economy, the situation is potentially serious. Mining, which accounts for about 7 per cent of gross national product, has been the main driving force in the economy for years. Economic growth slowed in the second quarter, partly because of a drop in demand for Australia’s resources.

Earlier this month, global research firm Variant Perception released a report arguing that the Australian economy was similar to that of Britain in that it had an overvalued property market and excessive household debt.

Overcoming these problems, the report argued, will not be easy. This is because for more than 10 years, the mining sector has created an overvalued exchange rate, effectively crowding out the manufacturing and other industrial sectors.

Indeed, for several years now, many observers have been referring to Australia’s “two-speed” economy, in which the industrialised south-eastern states were being left behind. Worse, the residents of cities such as Sydney and Melbourne were paying the price (via higher interest rates and job losses) for the boom in states such as Western Australia.

With the mining boom over, it is argued, Australia needs lower interest rates and an undervalued currency in order to help its industrial exports recover. But this could create other problems.

Until now, Australia’s persistent current account deficits have not mattered very much because they were more than offset by capital inflows. But with the Aussie dollar falling in value and interest rates easing, the economy could be in serious trouble.

With most of Australia’s external debt held by the banks, and almost half of it short-term, the country could face a financial crisis, possibly resulting in a government bailout. Add to this the drag on the economy resulting from the highly indebted Australian consumer and an ageing population, argued Variant Perception, and Australia could be facing a long period of much slower growth.

Some doomsayers take the issue further, insisting that two recently introduced measures – a carbon tax and a mineral resources rent tax – will accelerate the trend. Under the carbon tax law, mining firms, along with airlines and steel makers, have to pay a A$23 (S$30) levy for every tonne of greenhouse gases they produce. The mining tax imposes an additional 30 per cent tax on mining firms with annual profits in excess of A$75 million.
There is, however, an alternative view. This rests on the observation that while the mining boom has peaked in terms of investment, it is not over.

One of the chief proponents of this view is Mr Shane Oliver, head of investment strategy and chief economist at AMP Capital. Based on active projects yet to be completed, he said, there are about 18 months of investment commitments yet to run. After that, the country can expect a pickup in export volumes beginning around 2014.

He does, however, agree that the commodity price boom may be ending. Raw material prices, said Mr Oliver, generally follow a pattern in which a 10-year rise is followed by a 10- to 20-year bear market. After a 12-year bull run, new supply resulting from the global resource investment boom will ensure prices remain relatively low. In other words, the boom will wind down gradually, allowing everyone time to adjust.

Mr Oliver has a point. Indeed, the inevitable end of the mining boom should help Australia return to a more balanced economy. Tourism, non-residential construction and manufacturing, in particular, have suffered from the strong Aussie dollar and high interest rates for too long.

As for household debt, Westpac banking executive Jim Tate told a parliamentary inquiry recently that Australians were already paying off their debt at the fastest rate in 30 years.

The outlook may not be so bad after all.

(C) Singapore Press Holdings Limited