In 1986, then treasurer Paul Keating warned that Australia could become a “banana republic”. 38 years later, has Australia become an iron ore and coal republic?  

“This is the lucky country, we can dig up another mound of rock and someone will buy it from us, or we can sell a bit of wheat and bit of wool and we will just sort of muddle through … In the 1970s … we became a third world economy selling raw materials and food and we let the sophisticated industrial side fall apart.”

The growth in iron ore and coal exports

Over the last 20 years, Australian exports of iron ore and coal have exploded - see chart below. In the process, we have become the biggest iron ore and coal exporter in the world. In 2020, we provided 52% of global iron ore exports and 34% of global coal exports. The thermal coal price index is even named after Newcastle; otherwise known for Silverchair! In more recent times, Australia has also become a major player in LNG exports.

Australian Exports

1995 to 2020, USD, real

Source: Harvard’s Atlas of Economic Complexity

This has been a boon for the Australian economy and for the Commonwealth government’s coffers.

Of course most of these exports have been sent to feed the growing Chinese economy and real estate sector. Just as Japan slipped into demographic decline, Australia found a new benefactor - see chart below.

Chinese Imports from Australia

1995 to 2020, USD, real

Source: Harvard’s Atlas of Economic Complexity

The decline in other sectors

However, this growth in iron ore and coal exports to China is a double-edged sword. While it has been a boon to our economy, it has also stunted other sectors. Manufacturing value added’s percentage share of GDP has crashed from 13% in 1995 to 6% in 2020. Is the spectre of the “banana republic” rising again?

When we compare Australia’s mineral rents as a percentage of GDP to other countries we look more like the Democratic Republic of Congo than Canada (see chart below), and this is even with Canada's oil sands boom in the 2000s -  see chart below.

The mining boom has also increased our reliance on China, which as of 2020 was our largest export market by value with a 41% share.

The danger   

The danger of our concentration of export revenue in coal and iron ore to China, is that China has been active in developing iron ore and coal mines in other countries. In particular, China has long been investing in iron ore mines in the DRC, which made its first iron ore exports in 2019. It has also long been courting Brazilian iron ore, a fellow member of the BRICS grouping.

Chinese demand for iron ore and coal is also projected to slow over the next decade as steel production falls as its overall and working-age population falls. The Chinese government believes that its steel production will peak in 2030.

In its “March Resources and Energy Quarterly”, the Department of Industry said that these two factors will contribute to a fall in prices for many of Australia’s key mining exports and thus a fall in export revenue to 2028 - see chart below.

What does this mean for Private Debt in Australia?

A weaker Australian economy to 2028, may reduce SMEs demand for private debt over that timeframe. It also means Australian private debt providers will need to continue to focus on quality opportunities and perhaps be more selective in the mining space.