‘The Big Picture’ Long-Term Trends in Global Infrastructure Investment and Commodity Prices Warren Hogan Chief Economist May 2012

1 Outline Global Infrastructure Spending Trends Catching up for the industrialised economies Building out the emerging economies Commodity Boom – Natural Resources Linking infrastructure spending and commodity prices Some dimensions of the mining investment boom Case Study – Australia Overview of investment spending related to mining, energy and asscoaited infrastructure Structural change and macroeconomic stability

2 1. Infrastructure spending Is there an infrastructure cycle? Or just periodic bouts of under-investment Sources: ANZ, BEA (% of GDP) US infrastructure spending

3 A clear under-investment in the 1980/90s Australian infrastructure spending data back to the 1960s highlights a similar pattern to the US Sources: ABS, ANZ, BEA

4 The rise of the emerging economies A long-term view of the structure of the world economy Source: Angus Maddison, ANZ Research

5 Emerging Asia incomes are rising strongly Bringing with it strong demand for primary commodities Source: ANZ Research, United Nations

6 Expect large changes in the urban population of many countries: India, China, Pakistan, Indonesia & the US! Urban Population (m) Change (m) Bangladesh China Hong Kong Republic of Korea India Pakistan Sri Lanka Cambodia Indonesia Lao People’s Democratic Republic Malaysia Myanmar Philippines Singapore Thailand Vietnam United Kingdom United States Australia New Zealand Source: United Nations

7 The rising demand for industrial metals is linked with surging infrastructure spending Source: ANZ Research, BEA, World Bank Growing incomes and rapid urbanisation have seen the demand for infrastructure surge in the emerging economies

8 Sources: RBA, ANZ, BEA 2. The commodity boom Infrastructure spending is the primary determinant of real industrial commodity prices over the long-term Long-term commodity price cycle and US infrastructure investment

9 Stronger long term commodity demand still seems assured Emerging market demand is still modest on a per capita basis. The strongest gains will likely to be in energy market, particularly natural gas Source: ANZ Research Commodity Consumption Per Capita Nickel Steel Copper Natural Gas

10 Note: Seaborne iron ore, coking coal & thermal coal Sources: ANZ Research Despite very low per capita consumption, China and India already dominate global commodity demand – by 2015 both countries will be consuming over 50% of the world’s iron ore, steel and copper China & India Global Market Share of Demand US & Europe Global Market Share of Demand

11 The past 10 years has been a commodity “price” boom In the next 10 years we expect it to be a commodity “supply” boom Source: ANZ Research Global Commodity Price & Volume % Moves ( ) Global Commodity Price & Volume % Moves ( ) Years of Commodity production (on 2009 global reserves)

12 3. Case Study – Australia’s mining boom Australia set to spend just under A$2.0 trillion in natural resource investment in the next 20 years (top down estimates) Share of GDP 5.0%7.1%5.4%4.5%4.1%3.8% Source: Port Jackson Partners Total investment Total soft commodities$0.2 trillion Mining expansion$0.8 trillion Mining replacement$0.8 trillion Total$1.8 trillion Australia’s resource investment response will increase from an average $25bn per annum in the past decade to an average $90bn per annum over the next 5 years 0510F13F15F20F25F30F Mining replacement Mining Expansion Total soft commodities Real 2010 A$ billion pa

A surge in mining, energy and infrastructure investment has commenced Our bottom-up analysis shows total spending expected over the next 5-years has been revised up 50% in the past year Sources: Access Economics and ANZ 13

14 Advanced Minerals & Energy Investment Projects Source: ABARES

Mining-related investment and construction activity is already ramping up and the pipeline of planned projects keeps growing (WA, QLD, NT the major beneficiaries) Business Investment Profile Sources: ABS, Deloitte Access Economics, ANZ Major projects, by status Major Project investment pipeline 15 Energy Investment (% OF GDP)

16 With a fully employed economy, consumption needs to ‘make way’ for the surge of investment spending

17 The traditional mining states (QLD and WA) are performing much more strongly than the large South-Eastern states (Vic and NSW) State final demand plus net exports (4 - quarter moving average) Sources: ANZ, ABS

18 The mining, energy and infrastructure boom Western Australia is 15% of the national economy but over half the investment boom! Real value of engineering constructional and non-residential building work yet to be done Sources: ANZ, ABS

19 Australian labour market Huge industry changes mask overall softness in employment growth last year Sources: ANZ, ABS

Inflation The currency is playing a critical role in keeping inflation contained. Pressures are likely to build again in 2013 CPI by Category (Q4 2011) ANZ Inflation forecasts Tradeables & Non-tradeables Goods vs Services Inflation 20

21 The Australian dollar is heavily influenced by trends in commodity prices and is playing a central role in the determining economic outcomes in Australia AUD vs ANZ real commodity price index Source: USGS, ANZ

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