Special report: China boom turns Australia upside-down

The rise of a resource-hungry China to economic superpower status has stoked the greatest boom West Australia has ever seen. Two years ago, Kevin Hammer decided to pursue a piece of the action.

He and his partner run a steel-fabrication and welding business along a curve of white sandy beach here on the Indian Ocean. Looking to expand sales to the mining giants gouging iron ore for export from the red deserts to the north, they spent A$700,000 ($700,700) to buy the lot next to their workshop.

The China dividend never came.

Instead, they were socked with a nasty side effect of the China boom on Australia's manufacturers. Exports of metals and energy are so hot that the nation's currency has soared, rendering their products less competitive. In a bitter turnabout, Hammer says, Australian miners tell him he can't compete on cost and are giving contracts to Asian suppliers instead. Hammer has let go two-fifths of his staff and finds himself sometimes concocting make-work for the rest.

"You see those fancy shapes? I got them to cut those out just to keep them busy." He points to plates of steel onto which stylized silhouettes have been carved with a blow torch -- a vintage truck, an industrial crane, a lizard. "It's the same people driving the dollar up that are telling us we are too expensive," he says, shaking his head. "It's very, very frustrating."

Australia Disease

Australia, industrialists here warn, has caught a bout of "Dutch Disease." The term was first used to describe the impact that North Sea oil discoveries had on the economy of the Netherlands in the 1960s. Energy exports surged -- but so did the Dutch currency, and much of the manufacturing sector was pummeled.

Down Under, the dizzying boom in exports of raw commodities to Asia has sent the Australian dollar up nearly 50 percent since 2006: It's at parity with the U.S. currency today, up from just 70 cents in 2006.

That in turn has pushed up labor and other costs in the manufacturing sector as skilled workers switch to higher paid jobs in the resource sector. And for companies like Hammer's, it makes it far tougher to compete on price with foreign providers of goods and services.

The upshot: an estimated 100,000, or 10 percent, of the nation's manufacturing jobs have vanished in the past two years, according to the influential lobby Australian Industry Group. The distortions of the commodities-dominated economy are dire, AI Group chief executive Heather Ridout warned in a speech last month.

"They are burning holes in our industrial structure as we speak," she said.

In the age of China, there are now two Australias, many economists and political leaders here say. One is an explosively growing mining sector and the businesses and workers that feed it. The other consists of the manufacturers, tourist spots and others hammered by the distorting impact of China. There's a phrase for it on nearly everyone's lips: "the two-speed economy."

Two Speeds

This dual economy has become a serious political challenge for the minority Labor government of Prime Minister Julia Gillard.

This month, parliament's lower house passed legislation that would impose a 30 percent tax on the profits of big iron and coal companies, as part of reforms designed to balance Australia's budget and reallocate wealth from the mining industry to other sectors. The tax, to apply from next July, is expected to raise A$7.7 billion ($7.71 billion)in its first two years. It still requires Senate approval to become law.

"There is a general perception that we have done better than other Western countries because we are a quarry for China," says Senator Bob Brown, the leader of the Australian Greens party, which has been a strong supporter of higher taxes on mining profits. "But increasingly the two-speed economy is being lamented."

Australians consider this very much a made-in-China phenomenon. That is because their nation -- perhaps more than any other -- has fallen into the gravitational pull of the increasingly massive Chinese economy.

Feeling China's Pull

Last year alone, merchandise exports to China increased 39 percent to A$64.84 billion ($64.90 billion). Exports to China now account for a quarter of Australia's total. The impact of that growth on the overall economy is dramatic.

Between 2004 and 2009, Australia's gross domestic product increased at an annual average rate of 5.3 per cent in nominal purchasing power parity terms, according to ANZ Bank. In that time, the rise in commodity exports accounted for more than 50 per cent of all economic growth here.

China was by far the biggest driver of that commodity-export boom: According to the Australian Bureau of Resources and Energy Economics, China's share of Australia's resources exports hit 40 percent in the year to June, up from just 7 per cent in 2001.

The Chinese are exerting pull in other ways. They have surpassed the British as Australia's biggest source of tourists, with 500,000 visitors last year pouring $3 billion into the local economy. Chinese students are flocking to local universities, with 120,000 now enrolled, making Australia the No. 2 foreign destination for Chinese students after the United States.

China's growing weight in the Australian economy helps explain another trend here: anxiety at Chinese power.

In a move directly aimed at China, President Barack Obama announced on a trip to Australia in November that the U.S. will base up to 2,500 Marines in the northern city of Darwin. He billed it as the first step towards bigger military deployments in Australia. Beijing reacted furiously to the news.

Australians seem to approve. In a poll earlier this year by the Lowy Institute for International Policy, a private Sydney-based foreign-policy think tank, 65 per cent of respondents said they believed China aimed to dominate Asia. And 44 per cent believed it was likely to pose a military threat to Australia over the next 20 years.

Switzerland of the South

Many Australian leaders argue the concerns over the dual economy and Chinese influence are overblown. Australia has grown for two decades straight. Stabilized by its export boom, it sailed through a period in which America and Europe were rocked by their worst economic crises since the Depression. The unemployment rate is just 5.2 percent, versus 9 percent in the United States.

Most boats are rising. In its 2011 Global Wealth Report in late October, Credit Suisse said the Australians are now the second-richest people on earth, behind the Swiss. Average wealth per capita has quadrupled to $397,000 since the turn of the century, the report said. Moreover, these riches were more equitably distributed: The median wealth -- that held by the middle of the middle -- reached $222,000, the highest in the world.

In the manicured national capital of Canberra, Minister for Resources Martin Ferguson stresses these and other upsides of the boom. A former union leader, Ferguson says demand for raw materials from Asia offers unprecedented opportunities for Australians far beyond the mines and the natural-gas platforms.

The scale and complexity of modern resources projects require highly paid expertise in geology, engineering, maritime services, construction, finance, environmental science and legal services. These good jobs will deliver long-term prosperity.

"I'm not denying a section of the community is doing it tough, but we are the envy of many, many countries," Ferguson says in an interview. "The benefits of this are spreading through a wide part of the economy."

Some economists believe the strong Australian dollar is a net positive. Paul Bloxham, chief economist in Australia for HSBC, says the rising currency spreads the benefits of the boom throughout the population by raising everyone's purchasing power in a growing economy. "Anyone with an Australian dollar income or assets is now 25 per cent richer," he says.

Bloxham also questions whether Australia suffers from Dutch disease. The high Australian dollar has simply dampened, not gutted, other sectors of the economy while mining expands. He notes that in Holland itself, manufacturing rebounded strongly and remained robust when energy exports slowed. "Dutch disease implies you will be worse off," he says. "There will be some areas where you are worse off, but I think, overall, Australia will be better off for a high level of commodity prices and mining investment."

Up and Down

A demonstration of the China divide came in late August. BlueScope Steel, operator of the country's biggest steelworks in Port Kembla, New South Wales, announced it would abandon exports, close one of its blast furnaces and shed 1,000 workers. The company blamed the high Australian dollar, low steel prices, higher raw material costs and depressed domestic demand for steel.

Two days later, engorged on earnings from its iron-ore shipments from Western Australia to China, Melbourne-based BHP Billiton , the world's biggest miner, reported an 86 per cent increase in profit to A$22.56 billion ($22.58 billion).

The boom's center is Perth, capital of Western Australia, an arid state more than three times the size of Texas with more than A$200 billion ($200.20 billion)of resource projects in the pipeline. The fastest lane in the nation is now here, on Perth's main street, St. Georges Terrace, where global mining and energy giants jostle for space in the towers that overlook the Swan River and suburbs stretched out on the sandy coastal plain.

From his 24th floor office there, State Premier Colin Barnett reels off numbers that suggest no slowdown is in sight. Assuming China keeps growing at close to its current rate, he predicts the state's annual iron ore exports will double to 800 million tonnes before the end of the decade. Shipments of liquefied natural gas will more than triple to 60 million tonnes over the same period.

Barnett, a conservative, has won strong approval ratings for his stewardship of the local economy. With Western Australia driving Australian growth, it rankles that mining is accused of dragging the economy down. In the dotcom days of the late 1990s, the resources sector was derided as "old economy."

"Suddenly, because other industry is not doing as well, everything is the fault of mining," he says. Barnett agrees the strong Australian dollar hurts trade-exposed industries such as tourism, but he blames poor productivity for many of the problems in manufacturing. "I think Australian industry should be doing better in terms of local content from the mining industry, but local industry might need to lift its game."

Flattened Factories

Yet the mining boom is undeniably reshaping the Australian economy. Whatever its net benefit in the long term, its impact in the short term is painful for those on the wrong end of it.

Official employment data suggest local manufacturing is in precipitous decline. In just three months between May and August, 13,300 manufacturing jobs were lost in Western Australia, equivalent to 14.4 per cent of the workforce, according to figures from the Australian Bureau of Statistics.

"Right here inside the boom, manufacturing is suffering. There is no doubt about that," says Steve McCartney, secretary of the Western Australian branch of the Australian Manufacturing Workers Union. He says the big resources companies need to award more contracts locally. "It is going to die a slow death unless we get bold governments prepared to stand up to multinational mining companies."

Across Australia, businesses exposed to overseas competition with cheaper currencies and lower interest rates are under similar pressure. While Australia's globally renowned miners are seen as the backbone of the economy, manufacturing still provides far more jobs, with 980,000 employed in 2010 compared with 170,000 in mining and energy. But the mines are on track to eclipse factories by a crucial measure: Manufacturing's share of national output has shrunk from 26 per cent to in the 1960s to about 10 per cent last year. Over the same period, mining's share of output climbed from 2 per cent to 9 per cent.

Manufacturers are seething at their inability to capitalize on the China boom. A short drive south along the coast from Perth, in the industrial district of Henderson, managers at privately owned Westralian Engineering Services are dismayed at hurdles they face to win contracts on resource projects.

"We are continually being screwed to meet the competitive prices they can get overseas," says fabrication workshop manager Larry Chiera, a veteran of the mining services industry. Westralian Engineering has been forced to cut its workforce to about 60 from a peak of 90 in June last year as orders dried up for components, such as the heavy duty parts it had supplied for ore-moving machines.

"That is all gone," says Chiera. "All those items are now being made overseas, in India and China."

The company is now switching its attention away from iron to the oil and gas industry in the hope that investing in skills and technology would allow it to remain competitive in this more technically demanding industry.

Cold Comfort

Resource-industry leaders argue that rapid employment growth in mining and associated industries is compensating for some of the job losses in manufacturing.

Figures from the Chamber of Minerals and Energy in Western Australia show mining employment in the State had more than doubled in the last six years to 87,000 jobs. This was expected to reach 140,000 by the end of the decade, when construction was expected to peak on projects under way or in the pipeline.

That is cold comfort to manufacturers such as Hammer. A stocky 53-year-old with short, steel-grey hair, he leads the way from a cramped but neat office to an orderly complex of roomy workshops at the company site about 30 km (18 miles) south of Perth.

In mid-2009, his company, GF Engineering, employed more than 105 tradesmen and apprentices. It had more work than it could handle fabricating steel and specialized piping for the mine sites and oil and gas platforms that have transformed Western Australia from a remote backwater to a global resources powerhouse.

Since then the workforce has shrunk to 60, although the company still wins contracts from the miners, sometimes when components are needed at short notice. But two years after his ill-fated expansion, he still feels like the China boom has left him behind.

"They want all this money for themselves, but they expect us to live on a bowl of rice," he says.

($1 = 0.9990 Australian dollars)

[Source: By David Lague, Reuters, Perth, Aus, 30Nov11]

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