Stephen Simpson: One of the wealthiest countries in the world, and the richest in Asia in GDP per capita terms, Australia is an unusual mix of a modern market economy with a large commodities-driven export infrastructure. Despite the influx of wealth created by its natural resources, Australia has never been particularly successful in developing a large manufacturing base. What’s more, the country has run large and persistent current account deficits for over a half-century. Nevertheless, Australia has very significant and efficient mining and agricultural sectors, and ranks highly in the world in many categories [for more commodity news and analysis subscribe to our free newsletter].
Mining is significant within the country, accounting for roughly 10% of the country’s GDP, while mining-related industries add in another 9-10%. Furthermore, more than half of the country’s exports are comprised of various mineral commodities. Mining is conducted in all of the states/territories of Australia, and the country ranks in the top ten in the world in numerous categories. That said, the industry directly employs less than 5% of the nation’s population.
While the statistics and contributions vary from year to year (based on global demand and commodity prices), iron ore and coal are by far the largest contributors to Australia’s mining sector. Roughly 20% of Australia’s exports by value in 2011 consisted of iron ore, with roughly half of that going to China. Australia is the second largest iron ore producer in the world (after China), with about 480 million metric tons produced in 2011 [see also Ultimate Guide To Coal Investing].
Coal is a relatively close second place to iron ore. Coal made up about 15% of the country’s exports in 2011. With production of nearly 500 million metric tons in 2010, Australia was the fifth-largest producer in the world, but it uses relatively little of what it produces (one-quarter to one-third), making it the largest exporter in the world.
Gold is also a major commodity for Australia, with 270 metric tons of gold produced in 2011. That made Australia the #2 gold producer that year (behind China), and it comprised about 5% of the country’s exports in 2011.
A host of industrial metals also figure prominently in Australia’s mining sector. Australia is the world’s lead producer of alumina and bauxite (at 67 million metric tons, 50% larger than China’s production in 2011), and it makes up more than 2% of the country’s exports. Aluminum, too, is significant; although it accounts for less than 2% of exports, Australia is the #5 aluminum producer in the world at nearly 2 million metric tons. Copper also makes the list of Australia’s top 20 exports, and it ranks as the world’s sixth-largest producer (though it produces only about 20% of Chile’s output).
Other industrial metals like cobalt, manganese, nickel, tin and zinc figure less prominently in the country’s exports, but Australia is nevertheless among the world leaders in these commodities. Rare earth metals seem likely to become a bigger contributor in the coming years, as Australia does have relatively sizable economical deposits of many rare earth metals [see also REMX In Depth: The Five Minute Guide To The Rare Earth Metal ETF].
Last but not least, Australia is something of a player in gemstones. While Australia has the third-largest commercially viable diamond deposits in the world (behind Russia and Botswana), its annual production is much less significant at this point, though it does supply about 95% of the world’s opals.
Australia isn’t normally thought of as a player in the global energy scene, and it’s true that the country’scrude oil production (and reserves) are modest. That said, the country does have sizable offshore gas fields, and it is currently the third-largest producer of liquid natural gas in the world (and these exports make up more than 3% of the country’s total exports).
While much of the coal that is produced in Australia ultimately goes to electrical power generation, coal exists in sort of a grey area between mining and energy. Likewise with uranium. Australia is not only the #3 producer of uranium in the world (accounting for about 11% of production), but it also holds 23% of the world’s known reserves.
While most of Australia’s population clings to the coasts (since the deserts in the interior can be quite inhospitable), agriculture is nevertheless a significant export industry for the country. Agriculture contributes about 3% to Australia’s GDP and directly employs only a very small percentage of the population, but Australia exports about 60% of what its farmers produce [see also 50 Ways To Invest In Agriculture].
Australia is the world’s second-largest producer of wool, the fifth-largest producer of beef, the eighth-largest producer of cotton, and the 10th largest producer of wheat. Australia also ranks highly in less-commonly thought of agricultural commodities like barley, chickpeas, lentils, rapeseed, sugarcane and hops. Australia is also quite famous for its wine industry, though this is not a commodity industry. All told, agricultural products account for about 10% of the value of Australia’s exports.
As a country with a relatively small industrial/manufacturing base, Australia’s largest imports tend to be manufactured goods like cars, trucks, computers and consumer goods. The only commodities that features prominently among Australia’s top imports are crude oil and refined products like diesel and gasoline. Australia produces only about 50% of its own petroleum needs, but the combined value of the petroleum it imports is only about half the value of its iron ore exports.
Stocks/Funds To Play Australia’s Strengths
Two of the world’s largest mining companies, Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP), have deep and long-standing ties to Australia. Lesser-known Australian mining companies include gold miner Newcrest (NCMGY), iron ore miner Fortescue (FSUMY), and rare earths miner Lynas (LSYDY). Numerous Australian mining companies are listed on the Australian stock exchange, with many having double-listings on the London Stock Exchange as well. It is also true that many other mining companies, including Xstrata, Vale (NYSE:VALE) and Peabody (NYSE:BTU) have meaningful assets in Australia [see also An Investor’s Primer To Gold Mining: How They Dig Up The Yellow Metal].
In the energy sector, Woodside Petroleum and Origin Energy are the largest Australia-based companies, but major international oil companies like Royal Dutch Shell (NYSE:RDS), Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) are heavily involved in offshore energy projects.
There are a host of agricultural companies listed on the Australian Stock Exchange, but their equities are not listed on U.S. exchanges.
While there are ETFs that include Australian equities and companies with exposure to Australia, including MSCI Australia Index (NYSEARCA:EWA) and S&P Metals & Mining (NYSEARCA:XME), these do not offer especially good exposure to Australia’s commodity industries.
Trends/Developments To Watch
Australia has been a commodity-driven economy for most of its history, and it will likely continue to be so for the foreseeable future. While Australian governments occasionally make efforts to encourage the development of more manufacturing or higher-value industries like healthcare, the small population of the country and the proximity of China, India and Indonesia hamper these efforts.
Australia has generally been friendly to mining interests, but the proposal and establishment of a “super tax” in 2010 created a huge controversy within the country and with major mining companies operating there. Mining interests eventually negotiated down a much less costly tax mechanism, but the threat of future actions still exists.
It is also worth considering that the commodities boom that started over a decade ago is unlikely to last indefinitely. While the boom was fueled by decades of under-investment and nascent demand in emerging markets (especially China), huge increases in supply have come on line in recent years. While Australia is likely to remain a major player in numerous industrial, energy and agricultural commodities for decades, the value of those exports (particularly in industrial commodities) may not remain so high.
Written By Stephen Simpson From CommodityHQ Disclosure: No Positions.
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