Why wouldn’t the Australian mining industry be optimistic? In the last year, Iron Ore is up 70 per cent, Copper 46 per cent, and Gold is a steady performer, up 8 per cent. That’s before the conversation turns to the rare earth metals, such as Lithium, which has doubled. Surprisingly there has been little talk regarding production cost escalation. It’s a Goldilocks mining world.
Good times have allowed the industry the opportunity to focus on more significant themes this week. There’s lots of talk about electric vehicles, batteries, carbon capture, blue hydrogen energy and even nuclear power.
Dr Bradley Jones, Head of Economic Analysis, Reserve Bank of Australia, got everyone’s attention with a thoughtful presentation on the Australian economy and the post-pandemic bounce. Dr Jones revisited some other major economic shocks and posited that it was apparent that acceleration away from an event often leaves psychological scars across economies for the affected generation. The frugality of “depression babies” and recent risk aversion amongst the retirement cadre of baby boomers are classic examples.
The RBA has already had to change forecasts (Statement on Monetary Policy – May 2021) of the post-pandemic world as the strength of the economic rebound has caused Dr Jones and his colleagues to rethink the trajectory of what they are seeing. Coming out of the GFC, there was a general risk aversion, with investors and institutions crowding into large, liquid pools of capital, such as sovereign bonds and critical infrastructure assets. As a result, financial institutions rebalanced their risk appetite by realigning collateral risk weightings within their businesses, with many exceeding the minimum requirements under the Basel III regulations. One of the by-products of this shift has been the opening of a wedge between the interest rates (low) and growth asset valuations (high).
Household and corporate balance sheets have been rebuilt and were buttressed by government intervention early in the Pandemic. COVID has been a magnifier of these risk aversion tendencies and allowed a more expansionary psyche to dominate as the economy recovers. Dr Jones characterised the missing piece as “revenge consumption” — if the consumer returns armed with solid financial underpinnings, the economy will boom. The only cautionary note concerned the inflationary effects of such spending, this being somewhat of a wildcard in the context of Central Bank forecasts worldwide.
Meanwhile, the mining industry has not stopped investing, and looks well-placed to take advantage of moderate inflation via commodity price rises and increased demands for raw materials. However, the next challenge will be a pivot away from high-intensity carbon extraction and into critical climate-sensitive minerals as governments move to hit 2030 emission targets.