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Mining Boom Turns Bust in Australia, Raising Risk of Recession

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  • Mining Boom Turns Bust in Australia, Raising Risk of Recession

    Mining Boom Turns Bust in Australia, Raising Risk of Recession

    By Jason Scott

    Jan. 23 (Bloomberg) -- Michael Smith moved 2,500 miles across Australia in July to earn A$120,000 ($80,000) as a blaster. Now the 30-year-old explosives expert is a motorcycle courier making half his former wage.
    Smith’s woes mirror those of Western Australia, his new home, where a mining boom that drove 17 years of economic growth in the southern continent has collapsed. Commodity prices have slumped in the global credit crisis, forcing companies such as Rio Tinto Group to cut production and jobs.
    For the past three years, Western Australia’s expansion rivaled China’s, its biggest export market, peaking at 14 percent in the second quarter of 2006. With growth forecast to drop to 1.5 percent by 2010, the state may not be able to prevent Australia’s first downturn since 1991.
    “I’ve never seen anything like this,” said Mike Young, 48, managing director of Western Australian iron-ore explorer BC Iron Ltd. “The severity and speed of the crash was incredible.” The market value of BC Iron, which is due to begin production next year, fell 88 percent in 2008.
    Australia skirted the Asian financial crisis in 1997 and the dot-com bust in 2000. It may not be so lucky this time. The economy grew 1.9 percent in the third quarter of 2008, the weakest annual pace in more than five years. Western Australia contributed to half of that expansion.
    ‘Driver’ of Growth
    The state “was a driver of the strong growth we were having until recently,” said Shane Oliver, senior economist at AMP Capital Investors in Sydney. He predicts Australia will follow the U.S., Japan and Europe into recession this year.
    “The boost to national income from commodity prices flowing through Western Australia is going from a boom to a bust,” he said.
    Covering an area bigger than Alaska and Texas combined, Australia’s western-most state is rich in gold, iron ore, gas, diamonds and bauxite. A year ago, companies in Perth -- a city perched on the Indian Ocean with 1 million square miles of mineral-rich outback -- were struggling to find workers in a state with just 2.1 million people, one-tenth of the national population.
    Oil producer Woodside Petroleum Ltd. and miner Minara Resources Ltd. were among firms offering engineers, electricians, builders, truck drivers and miners wages as much as twice as high as they could earn in the eastern states.
    Now businesses are firing employees as they reduce output and dump expansion plans that the Chamber of Commerce estimated last year would total A$167 billion.
    Eliminating Jobs
    BHP Billiton Ltd., the world’s largest mining company, said on Jan. 21 that it would close a nickel mine in Western Australia and eliminate a total of 1,750 jobs in the state.
    Rio Tinto, the world’s third-biggest mining company, is slowing spending on a A$1.86 billion expansion of its Argyle diamond mine, cutting as many as 200 workers.
    Western Australia’s unemployment rate jumped in November more than any of the country’s other states to 3 percent from a record-low 2.3 percent in October. The national rate is 4.5 percent.
    The slowdown is taking its toll on a Perth housing boom that drove up prices by 146 percent between 2002 and December 2007. The cost of housing dropped 11 percent last year.
    The government forecasts the state budget will fall into deficit by June 2012 from a A$1.19 billion surplus for the current fiscal year, and debt will rise to A$16.7 billion.
    Chinese Market
    Businesses in Perth are looking anxiously toward China, which buys 50 percent of its iron ore from Western Australia. The world’s third-largest economy reported yesterday that growth cooled to 6.8 percent in the fourth quarter, the slowest pace in seven years. China buys a third of Western Australia’s exports.
    “China has been hit much harder than forecasters had predicted,” Prime Minister Kevin Rudd said this week. “Its slowdown will affect Australia.”
    Western Australia exported A$53 billion of minerals and energy in 2007, including 16 percent of the world’s iron-ore and 11 percent of its nickel. Prices of nickel, used in steelmaking, plunged 55 percent last year, and Chinese steelmakers are forecast to cut contract iron-ore prices 30 percent this year.
    The Deloitte WA Index, which tracks the market value of all Western Australian-based listed companies, fell 58 percent in 2008 to A$75 billion. Australia’s benchmark S&P/ASX 200 Index has dropped 46 percent since the start of 2008.
    Caught in the downturn, motorcycle courier Michael Smith is contemplating selling two houses he bought with borrowed money unless he can find another high-paying mining job.
    “When I came over, there was plenty of work and everyone was making money,” he said. “I’ve applied for everything, but a lot of the mining work is frozen now.”

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx