Our Reliance on the Mining Sector is Dangerous

11 Nov 11

Yesterday saw the Australian share market take a tumble on concerns over Italy's economy and weak import data from China.

Hardest hit were the Banks and Miners with the All Ordinaries Index slumping by 98.9 points on the back of fears that Italy is the next Eurozone country to default on its mounting debt and become the next European country to join the growing list of European economies needing financial assistance.

Italy, the eighth largest economy in the world is in debt to the tune of $2.2tn. Overnight, rates on Italian bonds rose past 7 per cent. When Ireland, Greece and Portugal hit this 7 per cent mark they needed to be bailed out. But Italy is "too big to bail out" and the possible effect from a failure of Italy is causing global markets to fall.

Not falling under the radar is the fact that the value of Chinese imports and exports fell in October as the Chinese government takes steps to relieve pressure on inflation such as curbing consumer demand and dampening property prices by increasing interest rates and restricting the amount of money banks can lend.

Chinese economic activity has also been heavily influenced by the deepening Eurozone crisis and US economic woes creating global uncertainty.

What does this means for Australia and our reliance on the mining sector? With Chinese imports and exports in decline it naturally means that demand for our resources will be in decline. 

Shares in QR National fell 1.8 per cent yesterday on news that QR National, Australia's largest privatised rail operator expects a 10 per cent drop in coal volumes to be hauled this financial year.

Australia's Treasury Secretary Martin Parkinson recently warned that unless Europe deals quickly and efficiently with the sovereign debt issue, the global economy could be dragged into a second recession. "The bigger risk to the Australian economy would be if Europe failed to deliver a comprehensive response to the sovereign debt crisis and found itself in a situation where, basically, it was dragging the rest of the world into a second global recession," Dr Parkinson told a Senate hearing.

"If that was the case - around 20 per cent of China's exports go to the US and about the same to Europe - obviously the impacts on Australia would be magnified."

Up until recent times the Australian manufacturing industry which contributes around 9 per cent of GDP has been an economic stalwart that has supported Australia's economic fortunes over many decades and been a large employer of Australian workers.

Foreign competition, lack of local input into Australian projects and a high dollar has seen the sector contract. It is hoped for Australia's economic future, in the face of a potential downturn in the mining sector as Chinese growth slows, that the recently announced Gillard government's Manufacturing taskforce can quickly address at least some of the issues currently facing the manufacturing sector, to provide a protective barrier around the sector, in a time of global uncertainty and secure the future of jobs in the sector.