RBA governor Glenn Stevens says WA has come back to the pack

RBA governor Glenn Stevens says WA has come back to the pack
RBA governor Glenn Stevens says WA has come back to the pack

Reserve Bank of Australia governor Glenn Stevens has joked the price of iron ore has even, on occasion, displaced from page one of newspapers the price on which Australians typically focus most intensely – that of a house.

He was speaking in Perth, with the RBA board meeting for the first time in Perth since September 2011. He noted the ‘super-cycle’ in commodity prices, and the associated surge in capital spending, had been of national and international significance.  

"I don't need to tell you that quite a lot has changed in the intervening period.

"At that time, the price of a tonne of iron ore was about US$170.

:A tonne of hard coking coal was bringing in about US$300.

"These were among the prices that saw Australia's terms of trade soar to a level some 75 per cent above their average for the preceding century.

"Few countries have seen such a windfall.

"These extraordinary prices had already, by that time, triggered a massive investment program, which was lifting capacity.

"Four years ago, Australia was shipping about a million tonnes of iron ore each day, which was already double the rate of 2004 - bit under a million tonnes of coal left our shores daily.

"By 2011, capital spending by the resources sector had already roughly trebled since 2005.

"It would peak the following year after rising by a further 50 per cent."

He said the results of that investment have come on stream, or soon will.

"Today, Australia ships around 2 million tonnes of iron ore and 1 million tonnes of coal per day.

"The investment was not just in iron ore and coal.

"On forecasts of strong demand from Asia – not just China but Korea and Japan as well – massive investments are under way in gas.

"LNG exports have begun from some of the Queensland projects and are expected to increase strongly over the coming years.

"As the WA projects come on line in the next few years, Australia's total LNG production capacity will reach over 80 million tonnes per year.

"This compares with a production capacity of around 10 million tonnes a decade ago."

As it happens, about the time the Board was meeting in 2011, resource prices and Australia's terms of trade were about at their peak.

"And what a peak it was.

"On a ten-year average basis, the terms of trade exceeded anything seen for at least a century.

"This was not just a very brief spike like some commodity price events have been (such as the early 1950s rise in the price of wool).

"It was quite persistent.

"Not permanent, but quite persistent.

"Nonetheless, the peak was four years ago.

"Today the price of iron ore is about US$40 per tonne, and coking coal around US$75.

"At a national level, Australia's terms of trade, having been through an extraordinary surge, have fallen by a third and are still declining."

But even at those reduced prices, iron ore is still bringing a price 60 per cent higher than it did in 2000.

Natural gas prices are 50 per cent or more above their 2000 level. 

"The spill-overs of these activities have been felt around the country.

"For the fifty years up to 2005, resources sector investment had averaged just over 1½ per cent of national GDP.

"Periodically, in a boom it tended to reach a peak of perhaps 3 per cent of GDP.

"While the episode is not yet over, at this point the economy overall has been recording growth."

Noting the RBA do not make detailed forecasts at state level, he noted previously, economic activity was very strong in the west and the north-east, driven by the investment boom, while in the south-east of the country it was somewhat subdued.

"Now, as the mining investment boom in the west is in the reversal phase, economic activity here in WA is more subdued, while in the south-east it is picking up.

"Consumer spending and employment growth in WA, which had outpaced the national average by a wide margin, have come back to be a bit below the national average.

"The rate of WA's population growth has slowed.

"Housing prices have declined a little, while those in Sydney and Melbourne have, at least until recently, risen at quite a clip.

"Measures of business conditions in WA are at about their long-run average, having been a long way above that for some years.

"So WA has ‘come back to the pack’, though the pack has actually picked up some speed in the meantime."

He concluded remembering the positive legacy of the events of the past decade.

Household net worth in WA in 2013/14 (the latest available data), at about $950 000 per household, was a good deal higher than in any other state.

"Since then, housing prices in WA have declined while those in some other places have risen, so this gap may have diminished.

"Nonetheless, my guess is that, among the Australian states, the citizens of Western Australia are on average, probably still among the richest.

"Even if the others gradually close the gap over time, as they well might, you are better off for having had the boom."

He said new opportunities for growth will emerge, resulting from things like the growth in the middle class of Asia, with all what that means for demand for services as well as for energy and agricultural production.

"The growth of India is surely also a potential opportunity for WA – facing as you do the Indian Ocean, and with the advantage of relative lesser distance.

"A mere eight hour flight time!" 

Jonathan Chancellor

Jonathan Chancellor

Jonathan Chancellor is one of our authors. Jonathan has been writing about property since the early 1980s and is editor-at-large of Property Observer.

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