Current Crisis with the Australian Mining Sector: Its Causes and Impact on the Economy - Coursework Example

Name: Course: Tutor: Date: Current Crisis with the Australian Mining Sector: Its causes and Impact on the Economy The Causes of Current Crisis with the Australian Mining Sector and the Extent of the Crisis on the Mining Sector Australian mining sector has been a major contributor to the economy of the country. Anything that affects it in turn affects the economy of the country. Australia is a country so much dependent on the export of raw materials obtained from mining such as coal, aluminium, bauxite, alumina, and iron ore among others. Since the discovery of gold and other mineral resources in Australia, the economic growth due to mining has gone up. This growth has since been shattered by recent events of the world. The world has experienced global economic crisis which has led to crisis in the mining sector too. The extent of the effect of the crisis on the mining sector and on Australia’s economy will be discussed including the causes. The current crisis in the mining sector is lack of funds to run the mining industries, high debts and retrenchment of workers in order to survive. There are high chances of the mining sector bringing down the economy with it down as it is going down currently (Martin 2009). As has been noted, Australia depends on exporting raw materials obtained from the resources the country has. Markets for such good have therefore to be available. The world has been experiencing global financial crisis which has affected markets for Australian exports leading to effects on the Australian economy. Australia exports its goods to China, Asia and other markets which have reduced their imports due to global credit crisis. The cause of Australian mining sector crisis is all due to a depressed market with reduced profits. The prices of materials such as iron ore are indicated to have reduced to half the price in the previous years (Mining Exploration News 2009). Global economic crisis has caused very bad effects to the mining sector with some companies being feared not to survive if the current situation of financial crisis continues. Mining companies have cut down the number of employees by a very big number in order to pay off debts, reduce overheads and to be at a position for weaker commodities demand (Martin 2009). These companies have suffered due to the reduced revenues and poor business in mining states and the inability to access funding due to severe credit crunch (Martin 2009) making them consider their viability first. In 2008 for example, Rio Tinto, one of the largest mining companies announced it would reduce its capital spending, reduce its workforce by 14,000 and sell some company assets in order to reduce its debts. An article from the Australian dated January 17th 2009 noted that Rio had cut down 14000 workers from its mining workforce (The Australian 2009). Just recently, the company announced some plans to reduce the workforce again by shedding 570 contractor positions and 135 full time jobs. This is an announcement that came after the company had stopped bauxite production in Queensland at the Weipa mines (The Bull.com 2009) Reduced prices and fall in demand for mineral resources in the mining sector made companies to slow down or stop the establishment of already planned projects. There was a project in Gladstone that aimed at expanding the Yarwun alumina refinery, but this had to be slowed down and also, Rio Tinto reduced production of bauxite from 19.4 million tones to 15 million tones in 2009 (The Bull.com 2009) which is the cause of more retrenchments. In 2008, BHP-Billiton was recorded as having shipped the least amount of Iron ore in a period of nine months (Heads 2008). It also canceled a contract on services at its coal mines in Norwich Park and Goonyella causing 350 people to lose their jobs in 2009. If the world’s largest mining companies records low shipment of minerals, what could be the impact on the mining sector in Australia? This crisis has hit hard on Australian companies with loss of jobs being the major impact (The Bull.com 2009). Within a period of eight months, that is, from July 2008, about 5000 jobs have been lost which constitutes 3.5% of the Nation’s workforce (The Australian 2009). The Reason Why and The Extent to which the Crisis has Affected Australian Economy The Australian economy has been severely affected by the crisis in the mining sector since the mining sector is a major contributor to the growth of the economy of Australia. Australia exports mineral resources to Asian and Chinese markets which boosts its economy. Reduced demands and reduced prices for mineral products therefore affect the income of the country and in turn its economy. Just as indicated earlier, the crisis in the mining sector has led to drastic changes in the country such as steep rise in unemployment. With high unemployment rates in the country, the economy cannot improve. The reason why Australian economy has been affected so much by this mining industry is quite clear. The countries capitalism is heavily dependent on mineral resources export to China, Asia and other markets and has been dependent on export of such materials for almost a century. This dependence cannot allow the country escape the severe effects of global financial crisis. China and Asia were among the countries affected by the global financial crisis and had to reduce their purchases for such materials from Australia. China for example, is indicated as having experience a reduction in their exports forcing them to reduce their imports. A metals trading company Sinosteel, in China also incurred loses leading to the closure of Channar mine which was Tinoto’s joint venture (Head 2008). Mining industry crisis generally has led to several problems in the nation that affects the nation’s economy negatively. These include: reduced expansion and growth of the nation’s major contributor companies to domestic income, drastic loss of jobs and reduced investments due to the status of the companies. A lot of information indicates that Rio Tinto has been severely affected with closure of some venture, cutting down of a big number of employees and suspending expansion programs. OZ mining company is the only company that was suspected not to stabilize due to its inability to meet deadlines for debt refinancing and loan securing. The company has since the crisis flagged 559 contactor and staff job losses (The Australian 2009). Xstrata is also another company affected by the financial crisis having a debt of $17 billion. The company had its shares slumped by 80% in 2008, has cut 580 workers and plans to lay off 300 more workers if a zinc mine installation in McArthur river is not approved by the government (The Australian 2009). In addition, by January 2009, BHP Billiton was indicated as having shed 3,400 Australian jobs and 2550 international jobs due to profitability prospects (Sydney 2009). Efforts by companies to expand or form mergers have also been thwarted by the crisis. Oxiana and Zinifex merger meant to create OZ chemical for example, faced debts refinancing problems and had to be bailed out by Minmetals from China (Price Water house coopers 2009). BHP Billiton’s plan to acquire Rio Tinto and acquisition of platinum producer Lonmin by Xstrata fell apart. Another planned merger between Lundin and HudBay was also not successful after a rebellion by shareholders (Mining Exploration news2009). The above information shows how the mining sector has been affected on investment practices, confidence on investors and shareholders on the companies, and lack of profit making due to poor prices and demand. All these effects go down to the Australian economy including the ones previously mentioned in the first section. Corporate leaders reported that with the international slow down, businesses were likely to collapse along with consumer confidence, faltering the economy of Australia. According to the Australian (2009), a reserve bank noted that the mining sector had become so important to the Australian economy that the effects of the crisis had to be particularly pronounced. The mining sector has contributed an extra $30 billion per year through investment to the Australian economy, with the sector reported to have held approximately a quarter of all private investments in the country in the last financial year. The article also noted that other sectors in the economy would be affected as well having slower activity due to reduced spending on inputs production and investment by the mining sector (The Australian 2009). The current mining sector crisis mostly characterized by job loses and corporate collapse indeed has affected the country’s economy and has spread to other sectors of the economy. Heads (2009), notes that the mining crisis has now affected even the financial, tourism, manufacturing, and construction and services sectors, and that every aspect of life in Australia has been affected. Effects that make the writer conclude that every aspect of life has been affected are several and one of them is the closure of 55 centers due to ABC learning bankruptcy that has affected child care (Heads 2008). In the financial sector, Macquarie bank in Sydney is suspected to have retrenched 1000 employees and the total job cut in the year 2008 is approximated to be 19,000 with so many banks noted to have cut down their employees. Manufacturing sector is noted to have experienced a loss of 38, 000 jobs in the past one year with some home wares chain suspected to close some of its stores in the future (Heads 2008). Not only are jobs lost in other sectors but consumer spending is also reduced. In October 2008 for example, car sales dropped by 22 % affecting the motor vehicle financiers while new housing projects presented for approval reduced by 26%. The fall of tax revenues due to unemployment and other effects on the economy also leads to federal deficit by billions in a year retarding the economic development that Australia has had for years and affecting development plans (Heads 2008). Conclusion Australia has not escaped from the effect of global financial crisis. Based on the fact that Australia depends on these natural resources to boost its economy, the crisis in its mining sector equally affects its economy. The effects may even be considered worse because it has affected other sectors of the economy. Many jobs have been lost, consumer confidence has been lost and investment has reduced. Mining sector has been shown to be a major contributor to the economy not only through revenue collection, but also through its relation to other sectors such as through input production and investment. An effect on the mining sector is therefore a major blow to the economy of Australia. Accepting this fact, Australia should find solutions to the current problems in the mining sector as well as an alternative method of improving the economy. The reason why this global financial crisis has affected Australia so much; is because of the effect on one sector which is a major contributor to its economy. This does not mean that if another global financial crisis could occur then Australia would not be affected. It only gives a solution to prevention of severe effects of such crisis. Other ways of improving the economy could also contribute to the economic development of the country therefore leaving the mining sector with a small percentage of contribution. The effects on the mining sector then would not be as much as when the country is dependent on it for its economic growth. A separate way/method of improving the economy reduces the burden on the economy and could also help reduce the effects of financial crisis when stable. This means that Australia should expand on and look for more domestic sources of income apart from exportation of natural resources for economic development. The global financial crisis however cannot be avoided by the Australian economy and its resolution only depends on the international policy makers. References Head, Mike. 15 December 2008. “Mining Crash Signals “Unmitigated Disaster” for Australian Economy”. World Socialist Website. Retrieved on 7th April 2009 from: http://www.wsws.org/articles/2008/dec2008/auec-d15.shtml Martin, Steve Jack. 2009. “Falling of the Mining Sector in Australia”. EzineArticles. Retrieved on 7th April 2009 from: http://ezinearticles.com/?Falling-of-the-Mining-Sector-in-Australia&id=1891005 Mining Exploration News. March 5th, 2009. “Mining Companies Optimistic, Mining Production and Industry Growth on Global Financial Crisis”. Retrieved on 7th April 2009 from: http://paguntaka.org/2009/03/05/mining-companies-optimistic-mining-production-and-industry-growth-on-global-financial-crisis/ Sydney, Phil Mercer. 21 January 2009. “Thousands Lose Jobs as Australia's Once-Mighty Mining Sector Suffers”. Retrieved on 7th April 2009 from: http://www.voanews.com/english/archive/2009-01/2009-01-21-voa13.cfm?CFID=158829748&CFTOKEN=83566489&jsessionid=003012abc89376557fcb454448593d702612 PriceWater House Coopers. 4 March 2009. “Australian Mining M&A to Intensify in 2009”. Retrieved on 7th April 2009 from: http://www.pwc.com/extweb/ncpressrelease.nsf/docid/7FE5FE2EE23EA157CA25756F001DBD14 The Australian. January 17, 2009. “Tough Times for Local Mining Sector as Prices Sink”. National Industries Skill Council Website. Retrieved on 7th April 2009 from: http://www.skillsdmc.com.au/Tough-times-for-local-mining-sector-as-prices-sink/default.aspx The Bull.com.au. Tuesday 07 April, 2009. Retrieved on 7th April 2009 from: http://www.thebull.com.au/articles_detail.php?id=1789 Read More