The Australian Future

August 31, 2015
Editor(s): Yue Han Chung
Writer(s): Gavin Cheng, Hutian Wang, Jenny Shen, Shania Nguyen

Today, Australia is facing major hardships in its strongest industries mining and manufacturing. With the recent decline in world demand for iron ore and the withdrawal announcement of Ford, Holden and Toyota, nothing seemed right for Australia. What does the future hold? And will Australia get out of this mess unharmed?

Competition on the global stage has never been more intense. As the mining and manufacturing industries are slowly creeping away from the spotlight, Australia is in search of industries that they will be relying on to maintain their viability on the world stage. So, which industries can we look to? In this article, we explore various alternative industries that merit serious attention, which we believe have the potential to become Australia’s next big industries, and bolster Australia’s presence on the world stage.

THE FALL

Traditionally, Australia has depended on the mining and manufacturing industries to support economic growth, which contributed up to 15% of real GDP as a whole in the March Quarter. However, evidence is mounting that these giants will be unable to support their growth rate in the future.

Data retrieved from ABS, (2015)

The quarterly figures in the Australian National accounts show an upward trend in the gross value added of mining. This seemingly suggests that the mining sector is set to increase in the near future.

But there is another side to the story.

Data Retrieved from Indexmundi, (2015)

There has been increased competition from abroad, with Vale, a Brazilian mining company, set to increase capacity to 450 million tonnes in the near future, which is backed by investments from China. Back in 2014, China’s iron ore imports accounted for about 69% of the world trade. Vale’s increased capacity is enough to meet half of that demand. This will likely lead to lower iron ore prices as supply in the iron ore market looks to increase.

The low iron ore prices are exacerbated by weakening demand of iron ore in China. Since the March Quarter, China has been experiencing a slight fall in steel production. It will take a while before the increased supply of iron ore in the market is cleared, which means prices for iron ore will likely remain low for the coming years.

Data retrieved from ABS, (2015)

Looking into the manufacturing industry now, the quarterly figures show an overall decrease in the gross value added. Although the manufacturing industry contributes greatly to real GDP, it is inevitably declining. To make matters worse, Ford, Holden and Toyota have announced to cease manufacturing in Australia in the coming years. This is, in part, attributable to Australia’s small population and distance from richer markets, which has placed the manufacturers in a very detrimental position, but more importantly, the fact that the Australian manufacturing sector is unable to compete with countries like China and the United States, which have a bigger population, and hence cheaper labour costs, and more capital for investment.

Unit labour costs in Australia have risen quicker than most other countries as well. It has become more costly for the manufacturing sector to employ workers which has consequently decreased profit margins of many manufacturing firms. Facing major challenges in its strongest industries, Australia has to come up with another plan to ensure that they stay competitive internationally while simultaneously supporting its high standard of living.

GROWING OUR WAY OUT

Judging from the current mining and manufacturing scenes, the agriculture sector looks set to develop into one of Australia’s main contributors to GDP. The world faces an increasing demand for agricultural products, but supply is struggling to keep up. The growing global population is one of the reasons why. According to the United Nations, the current world population of 7.3 billion is expected to hit 8.5 billion by 2030, 9.7 billion in 2050 and 11.2 billion in 2100.

Source: World Bank, (2015)

Additionally, the world demand of agricultural products is also driven by “the middle classes in emerging economies, especially in Asia”. The global middle class is projected to grow to nearly 5 billion people within 2 decades. This recent surge in the global middle class population has a positive effect on the demand for agricultural products because as the level of income rises, so do the calories per capita and protein consumption.

Source: Brookings Institution, (2011)

In the specific case of China, another issue is food security. Due to the severity of pollution, many agricultural products are deemed unsafe, and this has created anxiety amongst consumers in China. With more of the younger generations moving into the cities, fewer are meeting the agricultural demand by farming in rural areas. Another concern is maintaining a sustainable level of arable land. On another note, Australia’s high quality agricultural produce is highly reputable in China. Due to these reasons, China’s demand for agricultural imports is expected to rise in the near future. Back in 2012-2013, China substantially increased imports for Australian food produce. With an expanding global demand for agriculture and the capacity for further growth, the potential for exports of agricultural products continues to grow.

Amidst the expansion in global agricultural supply, Australia is well placed to capture this gap in demand and profit from the world. Currently, the agriculture sector is relatively small in Australia. It added $9131 million in the March quarter of 2015 and formed about 2.3% of the Australian GDP. Australia currently possesses 46.9 million hectares of arable land in total, while only 25.5 million hectares are currently been used for crop plantations. However, even presently, Australia produces more than enough agricultural products to sustain itself, with around two-thirds of Australia’s agricultural products being exported. Some other factors that benefit the Australian agricultural sector are the ending of the recent drought and expected increases in rainfall. These improvements in weather conditions may increase efficiency.

AID FROM ABROAD

Taking advantage from the significant increase in arrivals to Australia, the tourism industry is on a steady increase. Since mid-2014, Australian dollar has depreciated by 25%. As Australia is heavily dependent on the mining sector, the plummeting commodity prices are negatively affecting the dollar, meaning it is cheaper to come to Australia to visit.

Tourists are now more willing to spend than ever before. The gradual fall in the dollar makes it more appealing for international holidaymakers, as the relative cost of spending is lower. Kieran Davies, Barclay’s Chief Economist, now sees tourism as Australia’s second largest export, and based upon by its growth rate, he expects the sector to take over iron exporting in times to come.

Australia is welcoming the floods of tourists from the United Kingdom. With the rise in consumer confidence, British citizens are now spending more comfortably, especially on vacations and trips. Compounded with the depreciation of the Australian Dollar against the British Pound and the recent outbreak of Ebola in Africa, Australia became the natural choice for British tourists.

Source: Business Insider, (2015)

The tourism industry itself has brought significant indirect benefits to the Australian economy. One such example is employment; in the tourism industry alone, it has employed 4.6% of the workforce, which is approximately 500,000 individuals.  Demand for hotels and visits to tourist attraction destinations have also increased, creating direct revenue for local businesses. As seen on the graph, real spending in hotels, restaurants and cafes have increased considerably, and this is expected to continue as the dollar continues to fall.

Furthermore, the ACCC has recently approved the partnership between QANTAS and China Eastern Airlines on the grounds of building better pricing and scheduling co-ordinations. This partnership is expected to not only build a sustainable platform for future growth, but also to  boost the Australian economy as China has been identified to be the leading source of Australia’s inbound tourism, bringing in approximately A$9 billion annually.

A DEGREE ALWAYS HELPS

Apart from the agriculture and tourism industry, the education industry is also gaining traction in Australia. According to the Anning, the education industry is projected to grow at more than 4% per annum for the next 5 years and the key driver behind this growth is the arrival of more international students. Currently, international education is one of Australia’s largest service exports and has contributed $16.3 billion to the economy from 2013 to 2014. Around 16.3% of revenue generated within the industry is attributable to services provided to international students.

In 2014, Australia admitted a record number of international students coming to Australia for higher education. Out of all the countries, Australia has more students from China, India, Vietnam, Thailand and Malaysia. According to a recent projection, this figure will continue to increase in 2015.

HSBC points out that the depreciating Australian dollar is the main reason behind the flock of international students into Australia for the past two years. The Australian dollar is anticipated to depreciate over the next 5 years, which will continue to support the demand in the education industry. Furthermore, the Australian government has introduced incentives like streamlining the international student visa application process in 2012 as well as extra government funding to support the industry.

WHAT IS IN FOR AUSTRALIA?

The issue of the most concern with this inter-industrial change would probably be employment. With the weakening of mining and manufacturing industries, which has caused them to lay off quite a number of employees, it is expected that Australia has to deal with transitioning workforce from the weaker industry to the stronger industry in time to come.

Fortunately enough, we have already made plans. Politicians have for years been talking about training a skilled workforce as well as building a high tech community within Australia. With interest rates at its lowest level in 50 years, the government also hopes to stimulate interest-rate-sensitive parts of our economy, especially the non-mining business investments. With appropriate macroeconomic policy-making and microeconomic reforms, all hope is on a less painful and expensive transition.

Change is inevitable, but good change should be embraced. To stay ahead in the game, Australia has to jump on all the opportunities it can find. Hopefully, with more improvements in the commodity market, Australia will be able to enjoy its fruits of reforms.

Reference List

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Australian Government Department of Industry and Science., (2014). Automotive. Retrieved from http://www.industry.gov.au

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Reuters., (2015). Update 1 – China’s iron ore imports hit record high in 2014-custom data. Retrieved from http://www.reuters.com/

Robert, D., (2014). China aims for food security as pollution destroys crop land. Retrieved from http://www.bloomberg.com/

Saunders, A., (2015). China to bankroll Vale iron ore expansion. Retrieved from http://www.afr.com/

Scutt, D., (2015). Australia’s tourism sector looks set to boom as the dollar busts. Retrieved from                                                  http://www.businessinsider.com.au

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The Steel Index., (2015). Iron Ore Monthly Price – US Dollars per Dry Metric Ton. Retrieved from http://www.indexmundi.com/

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The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

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Yue Han Chung
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Jenny Shen
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Shania Nguyen
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