Dog Days: Australia After the Boom (Redback) by Ross Garnaut Page A

on conditions specific to each industry.
    For iron ore, immense investments in supply capacity in Australia and other countries are causing a huge increase in volumes to come to market at a time when the growth in Chinese demand has slowed sharply. This has brought down prices and will take them further as supplies increase considerably from late 2013. Similar dynamics are influencing metallurgical coal.
    The extent of the reduction in Chinese production as prices fall will be an important determinant of future prices. There are prospects for average future iron ore and metallurgical coal prices to settle higher than in the late twentieth century, and lower-quality mines will come into production to meet absolutely higher levels of demand. But these prices may be only half the peaks of late 2011 in real terms. There could be early periods when China is undergoing structural change and global supply is increasing rapidly in which prices are temporarily lower than future averages.
    Thermal coal use may not grow much, if at all, from late 2011 in China, the world’s largest market, so that increasing global supplies may cause real prices to settle at much less than half the 2011 peaks. Again, much depends on what happens to production from mines in China.
    Liquefied natural gas (LNG) exports will become increasingly important, so that gas prices will be influential in determining our terms of trade. Australian gas goes mainly to East Asia, where prices have been determined by formulae linked to oil and are now well above North American levels. Environmental priorities will cause Asian demand for gas to grow more strongly than for Australia’s other commodity exports. At the same time, world capacity is growing rapidly, with big investments in exploration and production applying old as well as unconventional technologies. Large efforts to expand domestic gas supplies in China (not yet certain to have broad success), overland pipelines from central Asia and Russia, new supply capacity in Canada and Mexico (as ways are found to subvert US controls on gas exports), the relaxation of export restrictions from the United States and a huge expansion of seaborne export capacity in Australia, Papua New Guinea, Southeast Asia and the Middle East are all increasing supplies to East Asia. The overall effects of these changes are not clear, but it would be surprising if Australian export prices didn’t settle well below current levels in real terms.
    Prices for tourism, education and other services are set in Australian dollars, so they rose for overseas customers as the real exchange rate went up, and will fall as the dollar comes down. This will place a significant drag on the terms of trade. Agricultural prices will generally be moderately higher than in the late twentieth century, reflecting Asian demand and constraints on global supplies.
    My best guess is that the terms of trade will settle on average about a quarter higher than the 1983–2002 average, which is a bit more than one-quarter lower than mid-2013. Potential government revenue from resources would be about 7 per cent of GDP below the peak of 2011 (or about 4 per cent below mid-2013 levels). Other potential Australian incomes from ownership of shares in mining companies would contract by 2 per cent of GDP from the peak (or 1 per cent from mid-2013). This means that the ‘permanent’ contribution of the 21st-century lift in the terms of trade to Australians’ average incomes is likely to amount to about 3 per cent of GDP, or about 10 percentage points lower than at the peak of the boom.
    The increase in revenues from the boom could have been saved by government. If all of it had been saved, pending clarification of how much of the increase was going to be permanent, the main effect of the terms of trade boom would have been to support budget surpluses, mainly in the commonwealth but also in state governments.
    As it turned out, almost all of the revenue increase was used