The Big Picture Long-Term Trends in Global Infrastructure Investment and Commodity Prices Warren Hogan Chief Economist May 212
Outline Global Infrastructure Spending Trends Catching up for the industrialised economies Building out the emerging economies Commodity Boom Natural Resources Linking infrastructure spending and commodity prices Some dimensions of the mining investment boom Case Study Australia Overview of investment spending related to mining, energy and asscoaited infrastructure Structural change and macroeconomic stability 1
1. Infrastructure spending Is there an infrastructure cycle? Or just periodic bouts of under-investment (% of GDP) US infrastructure spending 4.5 4. A 25/3 year cycle? 3.5 3. 2.5 2. Average = 2.5% of GDP 1.5 1..5. 1929 1932 Sources: ANZ, BEA 1935 1938 1941 1944 1947 195 1953 WWII 1956 1959 1962 1965 1968 1971 2 1974 1977 198 1983 1986 1989 1992 1995 1998 Under-investment 21 24 27 21
A clear under-investment in the 198/9s Australian infrastructure spending data back to the 196s highlights a similar pattern to the US 9 4.5 8 4. 7 3.5 6 3. 5 4 3 2 1 3 % of GDP 2.5 2. % of GDP 1.5 1. Australia, lhs USA, rhs.5. 1929 1932 1935 1938 1941 1944 1947 195 1953 1956 1959 1962 1965 1968 1971 1974 1977 198 1983 1986 1989 1992 1995 1998 21 24 27 21 213 Sources: ABS, ANZ, BEA
The rise of the emerging economies A long-term view of the structure of the world economy 4 % of total global GDP India China Western Europe US 35 3 India China W. Europe US 25 2 15 1 5 1 5 1 15 16 17 182 187 19 192 194 196 198 2 22 24 26 21 Source: Angus Maddison, ANZ Research 4
Emerging Asia incomes are rising strongly Bringing with it strong demand for primary commodities 5. Asia - Real GDP per Capita (USDth) 4. 3. 2. 1.. 199 1992 1994 1996 1998 2 22 24 26 28 21 China India Indonesia Source: ANZ Research, United Nations 5
Expect large changes in the urban population of many countries: India, China, Pakistan, Indonesia & the US! Urban Population (m) 195 197 199 21 23 25 Change 21-25 (m) Bangladesh 1.9 5.3 22.4 46.8 89.4 143.3 96.5 China 72.1 144.5 314.8 66.8 879.4 127 42.2 Hong Kong 1.7 3.5 5.7 7.4 8.5 8.9 1.6 Republic of Korea 4. 13. 31.6 39.9 41.8 38. -1.9 India 63.2 18.7 219.4 367.3 611.3 915.4 548 Pakistan 6.5 14.8 34.6 64.1 119.7 186.1 122. Sri Lanka 1.3 2.4 3. 3.1 4.7 7.5 4.4 Cambodia.4 1.1 1.2 3.5 7.7 13.4 9.9 Indonesia 9.9 2.6 56. 128.7 192.7 235.7 17.1 Lao People s Democratic Republic.1.2.6 2. 4.3 6.3 4.3 Malaysia 1.2 3.6 9. 2.2 29. 34.8 14.7 Myanmar 2.8 6.1 1. 17. 27.4 37. 2.1 Philippines 5.4 12. 29.9 61.8 93.9 117.9 56.1 Singapore 1. 2.1 3. 4.6 5.2 5.1.4 Thailand 3.4 7.8 16. 22.1 31.7 4.4 18.3 Vietnam 3.1 7.9 13.4 26.2 46.2 68.4 42.2 United Kingdom 4. 42.9 5.8 55.4 61. 64.6 9.2 United States 11.3 154.6 192.8 258.9 318.6 363.8 14.8 Australia 6.3 1.9 14.4 19. 23.2 26.3 7.2 New Zealand 1.4 2.3 2.9 3.7 4.4 4.8 1.1 Source: United Nations 6
The rising demand for industrial metals is linked with surging infrastructure spending Growing incomes and rapid urbanisation have seen the demand for infrastructure surge in the emerging economies 4.5 18. 4. 16. 3.5 14. 3. 12. 2.5 1. 2. 8. 1.5 1..5. Source: ANZ Research, BEA, World Bank 1929 1932 1935 1938 1941 1944 1947 195 1953 1956 1959 1962 1965 1968 US Infrastructure Spending, % GDP China Infrastructure Spending, % GDP (RHS) 7 1971 1974 1977 198 1983 1986 1989 1992 1995 1998 21 24 27 21 213 6. 4. 2..
2. The commodity boom Infrastructure spending is the primary determinant of real industrial commodity prices over the long-term Long-term commodity price cycle and US infrastructure investment 5 4.5 US Infrastructure (left) ANZ Real Industrial Commodity Index (right) 4. 4 3.5 % of GDP 3 3. 2.5 Index 2 2. 1.5 1 1..5 1932 1942 1952 1962 1972 1982 1992 22 212 NB. ANZ Real Base Metal Index includes Copper, Aluminium, Nickel, Zinc, Lead and Tin deflated using US CPI. Sources: RBA, ANZ, BEA 8
Stronger long term commodity demand still seems assured Emerging market demand is still modest on a per capita basis. The strongest gains will likely to be in energy market, particularly natural gas Commodity Consumption Per Capita 1.2 1. Steel Sth Korea 25 2 Copper Taiwan tonnes/capita.8 Taiwan Japan.6 China.4 EU Russia US.2 India Brazil. 1, 2, 3, 4, 5, kgs/capita 15 Sth Korea 1 EU China US 5 Russia Japan Brazil India 1, 2, 3, 4, 5, Real GDP per capita (US$) Real GDP per capita (US$) 3. Nickel Taiwan 2.5 Natural Gas US kgs/capita 2.5 2. 1.5 1. Sth Korea Japan kcm/capita 2. 1.5 1. Russia Sth Korea EU Japan China.5 EU Russia. Brazil US India 1, 2, 3, 4, 5,.5 Taiwan China Brazil. India 1, 2, 3, 4, 5, Real GDP per capita (US$) Source: ANZ Research Real GDP per capita (US$) 9
Despite very low per capita consumption, China and India already dominate global commodity demand by 215 both countries will be consuming over 5% of the world s iron ore, steel and copper China & India Global Market Share of Demand % global share 1 9 US & Europe Global Market Share of Demand % global share 1 9 8 over 5% mkt share 8 7 Iron ore 7 Copper 6 5 Steel 6 5 Nickel 4 Copper 4 Steel 3 Nickel 3 LNG 2 LNG 2 Iron ore 1 1 under 2% mkt share 1 3 5 7 9 11F 13F 15F 1 3 5 7 9 11F 13F 15F Note: Seaborne iron ore, coking coal & thermal coal Sources: ANZ Research 1
The past 1 years has been a commodity price boom In the next 1 years we expect it to be a commodity supply boom Global Commodity Price & Volume % Moves (2-21) Global Commodity Price & Volume % Moves (211-215) % 6 5 4 3 2 1 225% Iron ore Coking Gold Copper Thermal Oil Nickel Steel Coal coal 5 % Price Volume Alum'm % 7 6 5 4 3 2 1 (1) (2) Coking coal Iron ore Nickel Thermal coal Years of Commodity production (on 29 global reserves) 33% 7% Price Volume Alum'm Steel Copper Gold Oil 119 11 86 ROW 57 51 5 45 41 Australia 2 5 2 2 1 1 29 16 3 1 Source: ANZ Research BauxiteThermal coal Iron Met coal Uranium Gas Nickel Crude oil Copper Gold 11
3. Case Study Australia s mining boom Australia set to spend just under A$2. trillion in natural resource investment in the next 2 years (top down estimates) Australia s resource investment response will increase from an average $25bn per annum in the past decade to an average $9bn per annum over the next 5 years Real 21 A$ billion pa 65 12 83 79 Total investment 21-23 Total soft commodities $.2 trillion Mining expansion $.8 trillion Mining replacement $.8 trillion Total $1.8 trillion 9 84 Total soft commodities Mining Expansion 34 Mining replacement 5 1F 13F 15F 2F 25F 3F Share of GDP 5.% 7.1% 5.4% 4.5% 4.1% 3.8% Source: Port Jackson Partners 12
A surge in mining, energy and infrastructure investment has commenced Our bottom-up analysis shows total spending expected over the next 5-years has been revised up 5% in the past year $Abn 14 12 1 8 6 4 Communications Hospitals Water Supply & Sewerage Manufacturing Electricity Gas Pipelines Mining Energy Airports Rail Ports Roads 2 28 29 21 211 212 213 214 215 216 217 218 219 22 Sources: Access Economics and ANZ 13
Advanced Minerals & Energy Investment Projects Source: ABARES 14
Mining-related investment and construction activity is already ramping up and the pipeline of planned projects keeps growing (WA, QLD, NT the major beneficiaries) Business Investment Profile Energy Investment (% OF GDP) 6 5 4 Annual % change 3 2 1-1 Queensland -2 Australia (excluding - Queensland) -3 Australia (excluding - Queensland and Western Australia) 1 2 3 4 5 6 7 8 9 1 11 Major projects, by status Major Project investment pipeline Value of projects $bn (current prices) 35 3 25 2 15 1 5 Past projects Current projects Future projects $ billion 6 5 4 3 2 Non-Resource States Resource States 1 Completions Deletions Under Construction Commited Under Consideration Sep-6 Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Possible NSW VIC SA TAS QLD WA NT 21 211 212 213 214 215 Sources: ABS, Deloitte Access Economics, ANZ 15
With a fully employed economy, consumption needs to make way for the surge of investment spending 6 Forecasts 62 22 5 6 2 4 58 18 % change 3 2 % of GDP 56 54 16 14 % of GDP 1 52 12-1 1 2 3 4 5 6 7 8 9 1 11 12 GDP Q/Q change GFC GDP Y/Y change Qld floods 5 48 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 Household Consumption (lhs) Business investment (rhs) Forecasts 1 8 16
The traditional mining states (QLD and WA) are performing much more strongly than the large South-Eastern states (Vic and NSW) 12 State final demand plus net exports (4 - quarter moving average) 1 8 6 Annual % change 4 2-2 -4-6 -8 NSW VIC QLD WA 6 7 8 9 1 11 Sources: ANZ, ABS 17
The mining, energy and infrastructure boom Western Australia is 15% of the national economy but over half the investment boom! Real value of engineering constructional and non-residential building work yet to be done Work yet to be done (A$ billions) 7 6 5 4 3 2 NSW VIC QLD SA WA 1 1 2 3 4 5 6 7 8 9 1 11 Sources: ANZ, ABS 18
Australian labour market Huge industry changes mask overall softness in employment growth last year Hospitality Transport & post Retail Trade Wholesale Trade Manufacturing Arts & Recreation Administrative services Construction Utilities Professional services IT, media & telecomms Agriculture Finance & Insurance Education All Industries Rental & Real Estate Personal & Other Public Admin. Mining Health Net employment change, 12 months to February 212: +22k -6-5 -4-3 -2-1 1 2 3 4 5 ' change Sources: ANZ, ABS 19
Inflation The currency is playing a critical role in keeping inflation contained. Pressures are likely to build again in 213 CPI by Category (Q4 211) ANZ Inflation forecasts Education Insurance & financial services Transport Housing Health Alcohol and tobacco Clothing and footwear Food Communication RBA Target Band Recreation Furnishings, household equip. & services -2 2 4 6 8 1 12 % y/y Tradeables & Non-tradeables Goods vs Services Inflation 2
The Australian dollar is heavily influenced by trends in commodity prices and is playing a central role in the determining economic outcomes in Australia AUD vs ANZ real commodity price index 3. 8 2.5 7 6 AUD/USD 2. 1.5 5 4 Index 1. 3 2.5 1. 19 192 194 196 198 2 AUD/USD (nominal) ANZ Real Industrial Commodity Index Source: USGS, ANZ 21
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