Tourism, education and construction have all grown, as commodities have become less importantOct 25th 2018Print edition | Special report
TOWNSVILLE, A COASTAL city of 200,000 in the state of Queensland, owes its existence to commodities. The local agent for a Sydney merchant named Robert Towns founded it in 1864 to make it easier to export cattle from his employer’s huge inland ranches (or stations, in Australian parlance). The discovery of a rich nearby goldfield a few years later brought much more business to the port, which is closer to Papua New Guinea than to Sydney, and led to the construction of the city’s grand Victorian buildings.
There is not much gold left, but the commodity cycle still has a big effect on Townsville’s fortunes. Copper, lead, phosphate and zinc are mined in Queensland’s vast, arid outback and shipped to the city for export. The bits of the interior that are not being dug up are still given over to cattle stations. And closer by, dense green fields of sugarcane topped with fluffy white tufts of seed fill the narrow tropical littoral to the north and south of the city. The long “cane trains” that carry the crop to processing plants cross the coastal highway here and there on narrow tracks, bringing traffic to a standstill. The port of Townsville handles more sugar, copper, lead and zinc than any other in Australia. It also recently sent its first shipment of live cattle to China.
At the height of the commodities frenzy in 2013, Australia’s investment in new mines, gasfields and associated export facilities—many of them in Queensland—amounted to 9% of GDP (see chart). But when commodity prices began to slide a few years ago, Townsville’s economy was dragged down, too. Mining firms stopped hiring “fly-in-fly-out” workers based in the city. A nickel refinery on the outskirts of town folded, putting 800 people out of work and leaving A$300m in debts. Unemployment rose from 5% in 2013 to 9% in 2016. Property prices sank.
Yet the collapse in commodity prices was not the end for Townsville or Australia. In fact, it was a fillip for other industries, whose growth helped to make up for mining’s troubles. The plunge in investment allowed the central bank to lower interest rates, lifting the housing business. The sinking currency, which lost 40% of its value against the greenback between 2011 and 2015, caused the number of foreign tourists and students to surge. It also encouraged foreigners to snap up flats in Sydney and Melbourne, giving construction even more impetus.
Building work had reached a nadir in the first quarter of 2012, when construction firms completed projects worth A$20bn. In the last quarter of 2017, that reached A$29bn. Foreigners accounted for a good share of their custom: the Foreign Investment Review Board approved A$72bn-worth of residential-property purchases in 2016, up from A$20bn in 2011. At its peak, foreign buying accounted for a quarter of residential-property sales in the two big cities.
Tourism got a similar boost. The number of people visiting has risen by half since 2012, to more than 9m, and the amount they spend has increased by 43%, to A$21bn in the year ending in March (domestic tourists pony up even more). All told, tourism is Australia’s fifth-biggest export. Education ranks even higher, behind only iron ore and coal. Some 540,000 foreign students enrolled in Australian educational institutions this year, up from 300,000 five years ago. They bring in A$40bn a year.
Townsville is a beneficiary of all these trends. Rows of pleasure boats bob in the harbour, which provides easy access to nearby stretches of the Great Barrier Reef. Cruise ships dock regularly. The city’s biggest hotel, the Ville, which overlooks the glimmering Coral Sea, completed a big renovation in July. Occupancy is now 90%. Morris Group, which owns the Ville, has invested A$260m since 2010 in a string of hotels in northern Queensland.
The city also has two universities, as well as several research institutes. Last year the local branch of James Cook University (JCU) spent A$80m on a new science centre. JCU plans to invest a further A$1.9bn redeveloping the campus over the next 20 years, and will hire an additional 1,500 permanent staff. Roughly 18% of its students in Australia (it also has a branch in Singapore) are foreign.
There are other forms of diversification, too. Townsville hosts both an army and an air-force base. The state government has been expanding capacity at the local hospital, which serves as a regional hub. And the local, state and national governments are collaborating to build a big new stadium in the centre of the city, at a cost of A$250m. In fact, the national government has been spending more on infrastructure around the country in part to compensate for the mining bust.
In the end, Townsville stumbled rather than swooned in the commodity slump. Its economy shrank slightly in 2014-15 before returning to growth. Queensland, meanwhile, managed to avoid a contraction, although growth fell from 5.5% in 2012 to 1.2% in 2015. And Australia as a whole sailed through the mining bust, with GDP growth never falling below 2.4%.
What is more, the commodities bust was not quite what it seemed. Commodity exports have continued to increase, in volume at least. That is partly because the cheaper Australian dollar makes them more affordable for foreigners. But it is also because Australian producers are impressively efficient, and thus able to weather periods of low prices as their competitors go bust.
Iron ore, Australia’s biggest export, is a good example. Thanks largely to a decades-long building boom in China, demand rose steadily, lifting the price per tonne to $187 in early 2011. But as China’s economy slowed, and its government tried to boost services at the expense of investment in infrastructure and housing, the iron-ore price began a dizzying descent, to a low of $39 a tonne. It has since risen to $70 a tonne. Despite this upheaval, however, Australia’s exports of iron ore doubled to 818m tonnes in 2011-17.
Proximity to China means freight costs are lower than for other producers. And the Pilbara region in Western Australia is blessed with concentrated ore, which yields more iron per tonne smelted. Australia’s two biggest mining firms, BHP and Rio Tinto, have compounded these advantages with striking innovations.
A decade ago, there was nothing especially high-tech about the pair’s operations: iron-rich rocks were blasted apart with dynamite, loaded onto trucks, crushed and shipped by train to distant ports. Burly men in hard hats flew in for a week or two at a stretch to operate the machinery. Nowadays, however, ever more of this process is automated. Machines controlled from air-conditioned offices 1,000km away in Perth drill holes in the rock and insert the dynamite. Self-driving trucks grind impassively around the gigantic open-pit mines, delivering the ore to the crushers. In July Rio Tinto tested an autonomous train over two-and-a-half kilometres long, composed of 240 freight cars and three locomotives, which it calls the world’s biggest robot.
The self-driving trucks are 15% cheaper to run than the human-operated sort, Rio says. There are no idle spells between shifts or during breaks, and there is no need to fly burly men in hard hats up from Perth. The same goes for the automated trains, which deliver ore to port 20% faster. Data gathered by the drills about the rocks they are passing through, meanwhile, can be used to improve the placement of dynamite, monitor the hardness and concentration of the ore, and stagger the waiting trucks accordingly. In investor presentations there is as much talk of data analytics and the internet of things as there is of ore grades and smelting capacity.
In a sense, this impressive search for technological efficiencies is the flip side of a common criticism of Australia: that it is an expensive place to do business. The median wage is higher than in Europe or Asia and the OECD reckons that, at $22.23 an hour, the minimum wage is the third-highest in the group, measured by local purchasing power, behind only Luxembourg and the Netherlands. The country’s remoteness and its small population make all kinds of things pricey, from computers to food to energy.
These costs can be a burden to business. When the Korea Zinc Company sent Yun Choi to run its loss-making refinery in Townsville five years ago, he says, “the thought of shutting it down was on everybody’s mind”. Refining zinc is an energy-intensive process. Power costs were high, as were wages: a typical worker earns A$120,000 a year, Mr Choi says. The only way to keep the plant open, he concluded, was to enter the power-generation business.
He set up more than 1.2m solar panels around the factory, that can generate 125MW of power—roughly a third of the refinery’s needs. When wholesale prices are high, he stops zinc production and sells the power to the national grid. He wants to invest in wind turbines and batteries, too. Mr Choi has also set up his own trucking unit to reduce haulage costs to the port, halving logistics costs since 2015. The refinery is profitable again, and Korea Zinc is mulling an A$300m expansion.
It is expensive to do business in Australia but, says Mr Choi, that is an opportunity, too. Others agree: Australia is the world’s fourteenth-biggest economy, but ranks seventh in foreign investment received. That ranking has risen despite the end of the resources boom. And a big part of the appeal is the sound management and stability of the economy (see article).