1. bree.gov.au Australia and the Millennium Mining Boom Professor Quentin Grafton Executive Director/Chief Economist Bureau of Resources and Energy Economics Keynote presentation to ANCRE 2012 18th September 2012

2. bree.gov.au Overview I. Price Forecasting - Best and Worst of Times II. Macroeconomic Outlook & Overview III. Millennium Mining Boom IV. Sustaining Australia’s Future V. Closing Remarks

3. bree.gov.au I. Price Forecasting - Best and Worst of Times

4. bree.gov.au “Boom still on boil” AFR 10/9/12 “Iron ore prices have recovered some ground” The Australian 12/9/12 “The mining boom will not go on forever” BHP Billiton chairman Jacques Nasser Adelaide Advertiser 13/9/12

5. bree.gov.au Selected commodity prices: peaks & troughs ( nominal US dollars) Notes: prices are from the following dates Copper: 3-Jul-200824-Dec-200814-Feb-201129-Aug-2012 Aluminium: 11-Jul-200824-Feb-200928-Apr-201129-Aug-2012 Zinc:24-Nov-200612-Dec-20087-Jan-201029-Aug-2012 Nickel: 16-May-200724-Oct-200821-Feb-201129-Aug-2012 Uranium: Jun-2007Mar-2009Jan-2011Aug-2012 Source: BREE

6. bree.gov.au Tianjin Iron Ore Spot Prices (CFR) Source: Bloomberg

7. bree.gov.au Historical Iron Ore Prices Source: BREE

8. bree.gov.au Iron ore price & USD/AUD exchange rate Source: BREE Correlation coefficient 0.74

9. bree.gov.au What if? Iron ore prices and exchange rate Source: BREE

10. bree.gov.au II. Macroeconomic Outlook & Overview

11. bree.gov.au Economic Growth in Key Export Markets Source: IMF; BREE

12. bree.gov.au 10 year bond yield spreads to Germany Source: Bloomberg

13. bree.gov.au Debt Cycles and the Burden on Central Banks Source: Bank of International Settlements

14. bree.gov.au Value of R & E exports: actual & forecast Source: BREE

15. bree.gov.au Volumes, Prices & Values of Key Exports Source: BREE

16. bree.gov.au III. Millennium Boom

17. bree.gov.au Australia’s Terms of Trade Source: BREE; RBA

18. bree.gov.au Australian Merchandise Exports to China ($2010-11) Source: BREE

19. bree.gov.au Economic Variables: Before & During Boom (1.00 = initial year) Source: BREE; ABS

20. bree.gov.au Mean Weekly H-Hold Income ($2011-12) Source: BREE; ABS

21. bree.gov.au

23. Value of Exports ($2011-12) and Mining Employment Source: BREE; ABS

24. bree.gov.au Commodity Prices (real): Past Trends & Projections Source: BREE

25. bree.gov.au Australian Capital Expenditures in Mining and Completed Major Mining Projects ($2011-12) Source: BREE; ABS

26. bree.gov.au Cumulative real value of completed projects ($2011-12) Source: BREE

27. bree.gov.au Prospects: Value of advanced projects if NO NEW projects were announced ($2011-12) Source: BREE

28. bree.gov.au Commodity Production: Past Trends Source: BREE

29. bree.gov.au Bulk Commodities Exports Source: BREE

30. bree.gov.au Phases of the Millennium Boom bree.gov.au Source: BREE; ABS

31. bree.gov.au IV. Sustaining Australia’s Future

32. bree.gov.au Nineties versus Noughties Contributions to growth in average incomes by decade (percentage points, annual average) Labour productivity Terms of trade Labour utilisation Foreign income flows 2000s 1990s - 1 0 3 2 1 4 Contributed 1.2% per year growth in average incomes ] GNI per person Source: Australian Treasury

33. bree.gov.au Three Ps: 1992-2002 and 2002-2012 Income 49% Population 12% Participation 1% Productivity 18% Terms of Trade 4% 1992-2002 2002-2012 Income: Real gross national income: Chain volume measures Productivity: Multifactor productivity, quality hours adjusted hours worked 16% 3% - 3% 46% 86% Source: BREE; ABS

34. bree.gov.au Productivity Growth Productivity growth is supported by public and private sectors working together to: (1) Avoid infrastructure bottlenecks; (2) Ensure a tax system that rewards & supports productive activities; and (3) Skills & innovation framework for students and workers and that encourages R&D and on-the-job innovation

35. bree.gov.au Potential outcomes for income growth Terms of Trade Productivity Growth Maintain Decline 3.7% Low (2000s) High (1990s) Goldilocks Productivity Agenda Bears ‘Bad News’ 2011-12 Source: BREE

36. bree.gov.au V. Closing Remarks (1)Millennium Boom has been unambiguously good for the Australian economy with real income growth of about 40% over the past decade. (2)The ‘easy’ gains of ever increasing real prices is past. Forecast declining terms of trade requires Australia to substantially increase its productivity growth. (3)Investment phase of the boom has not yet peaked. Past and current mining investments could eventually lead to tripling of Australia’s export volumes from start of Millennium Boom to the 2020s.

37. bree.gov.au Thank You (quentin.grafton@bree.gov.au)