Industry Gross Value Added - Term Paper Example

?Executive Summary In recent years, Australia has continuously gained investor confidence because of its competitive business climate as revealed through its surging high foreign direct investment (FDI) inflow which doubles over five years to 2012. This country is known for its large mineral extraction industries, as it holds abundant supply of natural resources to generate supply for the world market. Developing countries like China and India are requiring more supplies for minerals and this is a great opportunity for Australia to improve its economy with its Mining Industry. Mining Industry in Australia was found to be the lifeblood of its economy due to its production, export value and profitability. In this paper, the proponent provides the necessary recommendations for the government to consider in order continue expand Australia’s leading role in mineral extraction in the world. Keywords: mining, mineral extraction, Australia Table of Contents Executive Summary 1 Introduction 3 Industry Gross Value Added 4 The Value of Exports 5 Operating Profit Before Tax 6 Mineral Production 7 Assessment of Mineral Extraction to Australia’s Economy 8 Domestic Issues 8 International Issues 9 Conclusion/Recommendations 10 References 12 Appendices 14 Introduction One cannot deny the fact that Australia is one of the countries with largest mineral extraction industries in the world today. It holds abundant supply of natural resources allowing it to generate a great opportunity to supply the world market as it is capable of providing affordable minerals of its own and efficient than other producers. This places Australia in the point of absolute advantage (Zhang, 2008). Furthermore, this sets Australia in the position to possibly be the unbeatable leading player in the global mineral commodities in the long run. This maximizes its potential to comparative advantage (Mudd, 2010). This information must be specifically appealing to the Australian Government, because in totality this has significant impact on its economic growth and development. Recently, Australia has continuously gained investor confidence because of its competitive business climate as revealed through its surging high foreign direct investment (FDI) inflow which doubles over five years to 2012 (Australian Trade Commission, 2013). This report is presented to the Australian Government which provides the actual assessment of the contribution of mineral extraction activity to Australia’s economy, and consideration of domestic and international issues that need to be addressed in order to maintain and expand Australia’s current position as the leading producer and exporter of minerals such as iron ore, coal and gold. The implications of these issues for Australia’s future are also included. Therefore, the work at hand provides the remarkable economic figures that will present the actual data prior to the analysis and assessment of the contribution of mineral extraction to Australia’s economy. In addition, the prevailing domestic and international issues that at some point may have strong contributions to the actual capacity of Australia to maintain its current position as a leading producer and exporter of minerals will also provide the bases of the actual recommendation for the Australian Government. Industry Gross Value Added Industry gross value added (GVA) is the contribution of an industry to the country’s gross domestic product (GDP). Based on the Australian Bureau of Statistics (2012), the total production of Australia’s Mining Industry as measured by the GVA showed a positive direction from year 1989 until 2010, which was clearly indicated by increased of 6% between 2008-2009 and 2009-2010, a double increase of percentage between 1989-1990 and 2009-2010. As shown in Figure 1 in the Appendices, the graph taken from the site of Australian Bureau of Statistics shows the actual GVA of Australia’s Mining Industry in terms of volume. The information in Figure 1 reveals not just about the volume of production, but the associated positive increase of monetary contribution of the Mining Industry into Australia’s economic growth indicator. However, considering that the value of mineral had substantially increased from 1989 to 2010, it is therefore expected that the value for GVA will also correspond to this change, because both the production and commodity prices have increased in this period. In other words, the volume of production with relevant inclusion of the commodity price for the mineral extracts cannot stand alone by itself to help determine the actual economic significance of mineral production in Australia. However, this information will give a remarkable trend on how much the Mining Industry is contributing to Australia’s GDP in particular. With this in mind, one can therefore deduce the fact that the Mining Industry is a significant component of Australia’s overall economic development. It gives the country a chance to develop more other related products as viewed at present (Richards, 2009; USA IBP, 2009; Australian Bureau of Statistics, 2008). To understand this point clearly, it is a good idea to take a look at the Mining Industry’s actual value of exports. The Value of Exports In Australia, two of the major industries that contribute greatly to exports are the mining and manufacturing based on the generated data from 2006 to 2011. Unlike the trend of contribution from the manufacturing industry, from 2006 to 2011 the contribution of the mining industry based on the percentage has a positive increasing slope based on the recorded monetary value linked to the percentage of share of the total exports. As clearly stated in Table 1, the value of exports of the manufacturing industry is decreasing based on the actual amount and percentage share of total exports from the overall industries (Australian Bureau Statistics, 2012). Thus, this significantly fails to illustrate the product life-cycle theory in the case of Australia’s mining industry (Cool and Goddard, 2006; Frenken, 2006). On the other hand, the mining industry remarkably created a staggering increase of value of exports and share of percentage from the entire industry. The highest percentage share of the Mining Industry is in between 2010 to 2011, which assumed more than half of percentage based on the share of total exports. As shown in Table 1, the Mining Industry did not start to provide a high share percentage of total exports starting from the years 2006 to 2007, but half of it was obtained by the Manufacturing Industry. However, as the year progressed, the Mining Industry showed a remarkable improvement of its percent share of total exports, leaving the Manufacturing Industry behind in years 2010 to 2011. This means that the Mining Industry has become the leading source of exports from Australia in all leading industry because of its 55.4 percent share in 2010 to 2011. Prior to this year, Australia’s Mining Industry began to contribute a higher percentage of share and dominating over all industries particularly the Manufacturing Industry as clearly stated in Table 1. The most important implication of the shown figures or numbers in Table 1 is that the Australian government is dependent on the Mining Industry when it comes to export. Export linked to mining is remarkably one important source of potential income of the country (Hillstrom and Hillstrom, 2003). For this reason, the elimination of Mining Industry will provide a significant challenge in the Australian economy. To illustrate more of this point of view, another important economic indicator linked to Australia’s Mining Industry is its actual operating profit. This will measure how profitable is the Mining Industry in Australia. Operating Profit Before Tax Table 2 in Appendices shows Australia’s Mining Industry’s operating profit before tax from the year 2008 to 2010 (Australian Bureau of Statistics, 2012). From 2008 to 2009, the greatest contributing activity with substantial profitability was the coal mining followed by oil gas extraction and metal ore mining. These were the three most profitable activities in Australia’s Mining Industry in 2008 to 2009. These three activities remained consistently present in 2009 to 2010, but the highest profitability turned to metal ore mining. The two activities have almost equal profitability share. The figures in Table 2 show that Australia is remarkably obtaining a potential financial gain from its natural resources. In 2010 alone, the noted profitability in totality reached to $51 billion, though a little lower than $63 billion in 2009. This information particularly in profitability has something to do with the production cost, even if as stated earlier, there was a clear evidence to show that the production activity for mineral extraction in Australia has consistently become a major economic activity as far as the higher export share of Mining is concerned. One important reason why Australia’s Mining Industry’s profitability decreased is the lower profitability value contributed by the coal mining and oil gas extraction (Australian Bureau Statistics, 2012). These activities however, are environmental related and it seems Australia was focusing more on metal ore mining in the succeeding years, allowing this activity to provide a substantial profit. For this reason, it is evident that the Mining Industry was able to employ initiative of doing another profitable venue for mineral extraction. Metal ore mining has become profitable in 2010, which means Australia is trying to invest more in activities that have significant contribution to its growing economy relying on its Mining Industry aside from the Manufacturing Industry (Hajkowicz, 2009). For this reason, mineral production may be another important highlight for as long as mining clearly has crucial contributions to Australia’s continuously growing economy. Mineral Production Australia is the leading producer of valuable mineral resources. Around the world, the country is the leading producer of rutile, zircon, bauxite and alumina, it is the second largest producer of gold, iron ore, lithium, manganese ore, lead and zinc, the third largest producer of ilmenite and uranium, and it is the fourth largest producer of silver, nickel and black coal (Australian Government: Geoscience Australia, 2013). With this information, one can clearly say that the mineral resources are significant component of Australia’s wealth. The world may rely on its supply of mineral resources because of the country’s greatest contribution especially when it comes to its volume of production. Mineral resources are Australia’s important ways to create monetary gain and explore the possibility of improving its economy even more. Mineral production is therefore a very important economic activity, which is the reason why aside from the manufacturing activities, mining has become the crucial focus of any relevant export activities. This made more favorable in Australia because of some other important factors. Factors such as rich and diverse mineral capability, lower risks of exploration due to quality standard regional-scale geoscience information, advanced exploration, mining processing technologies, equipped work force, favorable physical condition and low population density provide Australia the competitive edge especially in line with the production of mineral commodities (Australian Government: Geoscience Australia, 2013). All of these are Australia’s competitive advantages as far as its Mining Industry is concerned. In other parts of the world, these factors can hardly be obtained, allowing investors to probably focus their eyes on Australia’s mineral resources and ensure achieving their share in the actual mineral production. With regards to all the information stated so far, it is now time to provide important assessment of mineral extraction to Australia’s economy. Assessment of Mineral Extraction to Australia’s Economy In substantial detail, it has been shown so far that Australia is indeed home to rich and a vast stretch of mineral resources. This country without question has remarkably shown higher profitability for its mineral extraction, as far as high exports pertaining to mining is concerned. In addition, mining has become a clear path for Australia especially that this Industry has significantly contributed higher value for the country’s GDP. In other words, without the mining Industry, Australia’s economy will have to undergo a tough challenging scenario. For this reason, it is implied that to address some remarkable concerns that may potentially threaten the stability of the Mining Industry in Australia is a very important activity that the government should take into a priority account. In the next section, domestic and international issues are introduced in order to create a solid foundation for the recommendations or alternative course of actions that the Australian government should take. Domestic Issues State and Territory government agencies are the ones able to promote regulations pertaining to mining, health and safety regulations and legislations associated with the mining industry. This involves the specific function of the State government mines departments to take charge of granting exploration and mining tenements, and collect mining royalty payments from the companies (Australian Government: Geoscience Australia). Regulations and legislations are therefore serious issues that every investor will have to consider upon moving on with the possibility of mineral extractions in Australia. In Australia, the continued mining boom has been viewed to threaten to complicate fiscal policy making (OECD, 2010). For this reason, OECD presents the ideas that sharing of the rents from non-renewable resources upon their efficient exploitations, and the flexibility of tax revenues in line with the probabilistic nature of commodity price developments should be among the primary considerations of the investors. The victory of Tony Abbott signifies Australia under a new management that is open for business (BBC News, 2013). How flexible it will go is the potential concern of investors. In addition, there are also greater needs of the Mining Industry and one of them is the need to enhance infrastructure capacity. For this issue, public investment may be so required (OECD, 2010). On the other hand, investors will have to consider the strong voice of the Indigenoues Australians, who are protected by laws. Recently, these people won their case over a mining firm that desecrated an Aboriginal site (BBC News, 2013). International Issues As the products of globalisation prevail and the barriers to trade are minimized, the world economic growth is at its most critical point. The World economic growth in recent years led to a surging demand for mineral products around the world, which in particular China and India have become the leading countries where there is a huge volume requirement (Australian Government: Geoscience Australia, 2013). This definitely provides the opportunity for Australia and its mineral resources to be more productive for its economy as far as its mineral exports account for 50 to 60 percent of the its annual value of total exports of goods and services resulting to $164.3 billion in 2011 to 2012 from $45.9 billion in 2002 to 2003 as dominated by coal, iron ore, alumina/aluminum, copper, nickel and gold (Australian Government: Geoscience Australia, 2013). As already presented earlier, this trend was due to the increase in both production and commodity prices. However, multinational companies are searching for mineral deposits that will provide them substantial returns on investment. This means that even if Australia contains huge economic resources of mineral commodities, the use of them may not be guaranteed for as long as the factors including quality of the resources, environmental, social and political, land access and the location and scale of competing projects are concerned (Australian Government: Geoscience Australia, 2013). The above stated factors have remarkable implications on Australia’s Mining Industry. For instance, in line with environmental factors there was a lesser profitability for coal mining as stated earlier because this might be due to the prevailing global warming issue. Putting Australia and become more open to business is a potential socio-political factor (BBC News, 2013). On the other hand, the site of Australian Government: Geoscience Australia added that minerals projects underwent ranking by multinational companies against investment returns from other projects worldwide especially in hard financial times. This creates a point that the scale of competing projects must be another substantial priority. Conclusion/Recommendations This report presented facts and figures concerning Australia’s Mining Industry’s contribution to economic development and the significant domestic and international issues that may probably sustain or hinder it from moving to its upward spiral. Concerning this point, below are the recommendations that government should probably have to consider. The need to consider review of domestic regulations and legislations that are more flexible or open to business opportunities especially for the Mining Industry in Australia significant to the new administration. This will ensure more opportunity for investors to prioritize doing business with Australia especially in mining or mineral extraction as proven activity with high economic contribution for the country. A surging demand for mineral products would mean Australia will be of its competitive edge. However, this cannot totally guarantee a prioritize investment from investors amidst its rich mineral resources. Therefore, the need to consider policies that will ensure high return of investment for investors is necessary. In line with this point, the following considerations may potentially apply. More flexible governance towards business. Government must encourage and support public investment to meet high requirements for mining infrastructure. Flexible options for FDI ensuring more consideration of environmental and socio-political factors. References Australian Bureau of Statistics (2013) Mining Industry: Economic Contribution [online] available from [20 November 2013]. Australian Bureau of Statistics (2008) 2008 Year Book Australia No. 90. Canberra: Australian Bureau of Statistics. Australian Government: Geoscience Australia (2013) Australia’s Identified Mineral Resources [online] available from [20 November 2013]. Australian Trade Commission (2013) Australia’s FDI doubles over five years to 2012 [online] available from [20 November 2013]. BBC News (2013) Australia election: Tony Abbott defeats Kevin Rudd [online] available from [20 November 2013]. BBC News (2013) Mining firm desecrated Australia Aboriginal site [online] available from [20 November 2013]. Cool, K., and Goddard, G. J. (2006) International business: Theory and practice. Armonk, NY: M. E. Sharpe. Frenken, K. (2006) Innovation, evolution and complexity theory. Cheltenham: Edward Elgar Publishing. Hajkowicz, S. (2009) ‘The evolution of Australia’s natural resource management programs: Towards improved targeting and evaluation of investments’. Land Use Policy 26(2), 471-478. Hillstrom, K., and Hillstrom, L. C. (2003) Australia, Oceania, and Antarctica: A continental overview of environmental issues. Santa Barbara, CA: ABC-CLIO. Mudd, G. M. (2010) ‘The environmental sustainability of mining in Australia: key mega-trends and looming constraints’. Resources Policy 35(2), 95-115. OECD (2010) OECD Economic Surveys: Australia 2010. Danvers, MA: OECD Publishing. Richards, J. P. (2009) Mining, society, and a sustainable world. London: Springer. USA IBP (2009) Chile mineral & mining sector investment and business guide. Washington, DC: International Business Publications. Zhang, W. B. (2008) International trade theory: Capital, knowledge, economic structure, money and prices over time. Berlin: Springer. Appendices Figure 1. Australia’s Mining Industry production based on gross value added (GVA) and volume measures from 1989 to 2010 (Australian Bureau Statistics, 2012). Table 1. The value of exports from Australia’s Mining Industry from 2006 to 2011 (Australian Bureau Statistics, 2012). Table 2. Australia’s Mining Industry and operating profit before tax from 2008 to 2010 (Australian Bureau of Statistics, 2012). Read More