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The Forum > Article Comments > The super-cycle of commodities and the Lucky Country > Comments

The super-cycle of commodities and the Lucky Country : Comments

By James Cumes, published 1/8/2007

Australia may have mountains of iron ore, masses of nickel, copper, uranium and all the rest, but we must heed the limits to growth.

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The reason the direst predictions of Limits to Growth were never realised is because the warning was heeded -- industry became less resource-intensive and economic growth became decoupled from growth in consumption of raw materials. Productivity of laour and resources was intensified.

This was the direct cause of the commodities slump which began in the mid-1970s.

Right now, China (with some other countries) is in a similar position as the big manufacturing economies (the USA, Japan, Germany) were in in the late 1960s -- except that in China today the greatest limit to growth is the saturation of the local environment with pollutants and the rapid decline in usable agricultural land, rather than the exhaustion of raw materials.

China is well aware of the risks it faces. Either it will change the focus of its investment from the fastest and cheapest possible growth to cleaner production and more efficient utilisation of resources, or it will hit the wall with a sickening crunch.

Whichever happens, consumption of raw resources such as those Australia exports is going to decline, either soon and slowly or later and very fast indeed.

Australian investors would do well to anticipate this, for instance by investing directly in clean and efficient technology in China.
Posted by xoddam, Wednesday, 1 August 2007 10:51:05 AM
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The current Establishment seems to think the Asian miracle economies are like a sun in which Australia basks. They could also be a death star that sucks in all our vitality leaving us vulnerable. Most commentators say the Chinese economy has too much momentum to ever implode, it will only slow down. However this European Tribune article http://www.eurotrib.com/story/2007/5/13/105158/220 suggests that China will have coal shortages as early as 2009. That would put the Rudd government in the excruciating position of wanting to prop them up with more coal shipments the same time as talking up climate action.

I'd guess that along the way the Asian middle classes will have a bit more, the Western middle classes a bit less and as always the really poor miss out altogether.
Posted by Taswegian, Wednesday, 1 August 2007 11:02:53 AM
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" I don't want to be alarmist " says the author, yet this (and pretty much all his previous articles) reveal that's exactly what he wants.

Yes the commodities boom is good for Australia. No, it won't last forever. But the prophets of doom who foresee resource depletion causing economic collpase will be wrong this time, as the "limits to growth" crowd, Ehrlich, Malthus and most of their other predecessors were wrong.
Posted by Rhian, Wednesday, 1 August 2007 3:17:09 PM
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We are the lucky country. Lucky there is only one John Howard (well political anyway). And lucky that time has worn him down. His current mental condition is obviously deteriorating but no one behind him has the guts to say it. I do.
Posted by DavoP, Wednesday, 1 August 2007 3:24:36 PM
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Australia has now become what was known in colonial times as the quarry economy, in which almost total reliance was on pitstock limited resources that will eventually run out.

As one formerly proud of our achievements in techological innovation, particularly related to agriculture, it is depressing to note most of our machinery needs now purchased overseas, with much money also spent on mining infrustructure which is really only temporary.

Also because we now purchase most of our machinery and techo- hardware from overseas we now have an overseas trading debt so large we have the IMF carefully watching our economy.

With the amount of money we are making out of our pitstock resources it is believed we should be bolstering our local manufacturing capacities better now than ever.
Posted by bushbred, Wednesday, 1 August 2007 4:53:16 PM
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Errr... Taswegian, if that document about Chinese "peak coal" is right, all my optimistic guesstimates about opportunities to switch to renewable energies are waaaay out.

If it's correct...

The world economy *is* about to run out of energy. Suddenly and painfully. Solar, wind and nuclear power are but three drops in the ocean today, and if the coal is to be gone in twenty years or less they will not grow fast enough to replace it.

Global warming will be a smaller problem than I had feared: if fossil fuel is *gone*, we will be stopped from burning it by force. Perhaps not quite soon enough to prevent some of the 'tipping point' feedbacks like thawing tundra, but the (huge) human problems of (geologically minor) climate change will be trivial compared with the cold, the hunger and the land-clearing resulting from the energy famine: remember biofuels compete with food crops.

There won't time for market-based approaches to gradually replace fossil-fuel infrastructure with renewable electricity generation, and convert transportation to electricity or hydrogen. All those shiny new steam turbines will be burning green wood in 20 years, then they will sit idle in a barren plain.

I hope it's wrong. I really do. I hoped enough people amongst the Chinese government had their materialist heads screwed on straight to avoid disaster (although I knew enough of them were twisted that they carry on persecuting religious minorities).

Maybe I was wrong. Maybe the coal is almost gone.

I am now very afraid.
Posted by xoddam, Thursday, 2 August 2007 11:18:39 AM
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Xoddam,

there is no need to worry about coal running out in the next twenty, thirty of hundred years. It is a widespread resource, with most coutries in the world having resources of coal.

When talking about minerals, people refer to resources and reserves. Reserves (which are at a much higher level of certainty) are based on minerals that have been well explored, have mine plans run over them and are economic at present. All that costs a lot of money to do, so companies and governments do not want to spend too much money proving up reserves too far into the future. (the time value of money means that the future revenues from the project would be discounted too heavily, and not meet the costs of explorations and feasibility studies).

So we always only have twenty to forty years of reserves of most minerals. Just enough to get to an acceptable level of confidence that the coal (or iron ore or oil) is there in sufficient quantity and quality. We would loose money by having more.

Resources do not have mine plans run over them, but are graded according to the level of certainty (measured, indicated and inferred - decreasing certainty), and are classified by geologists who must only include resources that are reasonably confident of being economic. Resources are always bigger than reserves, even for the same deposit.

For more info on this, google the Australasian Institue of Mining & Metallugy (AusImm) and JORC code. This is a widely accepted code for mining companies reporting on stock exchanges (necessary in Aus).

Forecast coal usage will increase (the Stern report has increases of at least 30% over current levels over the next 30 years) in the near future as more countries take advantage of the favourable energy security aspects of coal to meet increasing demand for energy. If reducing carbon emissions is desirable, then the best way of doing this when coal use is increasing strongly will be through technology to produce "clean coal". Renewables will also be important for societies who can afford them and want them.

Cheers
Posted by miner, Friday, 3 August 2007 8:06:02 AM
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Phew!

Miner, you're right. I misread it at first -- it says *world* coal production will *peak* within 20 years, not that the Chinese will run out by then.

Chinese production will peak *very* soon; they have 50 years (not 20) of *reserves* at present production rates, and "peak" means production will slow down after that, so they'll have time to scale down consumption. Probably half those Chinese-made steam turbines are disposable in any case :-)

The 20-year threshold was for world *peak* coal production. World peak oil is more-or-less now, but we likewise still have a few decades of reserves (+ more of resources) left.

All we have to deal with are soaring prices and CO2 emissions -- and improved energy efficiency will compensate equally well for both.

BTW I did know the difference between resources and reserves, what alarmed me was that the study demonstrates that both reserve figures and resource estimates have been shrinking, not growing, with improved assessments. Australia and India are the two exceptions to the rule: other major producers have revised both numbers *downwards*, by 99% in one case.

Here's the pdf of the detailed study, if you're interested:

http://www.energywatchgroup.org/files/Coalreport.pdf

I only spent about six hours being worried :-)

P.S. "Clean coal" can't reduce CO2 production by much at all; adding the cost of geosequestration would push the price of most coal-fired electricity up beyond even today's wind & geothermal power, let alone emerging technologies, nuclear power and large-scale solar thermal generators. The only viable "clean coal" technique I'm aware of is using flue gas to fertilise oil-bearing algae for biodiesel production, getting a second energy bite out of the same carbon apple. We'll need a lot of that to cope with Peak Oil :-)
Posted by xoddam, Friday, 3 August 2007 2:09:31 PM
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Miner, yes it is not conceivable that mineral (and coal) resources will run out in the near future.
However, the costs will put a damper on things.
At the present, the mining industry estimates that ten per cent of world energy is expended on crushing rocks - whether it is for gold, cement, bricks. The costs for supplying that energy are sure to increase.
Then there is the certainty that recovery of new resources will be from more difficult reserves: mining deeper than at present, and probably from lower grades.
The factor of (more costly to mine reserves) X (more costly energy) does not make for an increasingly healthy economy or society.
If we are not worried by present rates of growth we do not have our heads in the real world.
Posted by colinsett, Friday, 3 August 2007 5:53:28 PM
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Had a quick look at the report, will have a closer look this week. A couple of points,

* the team that developed the Coal Resources report appear to be slightly weighted towards the non-coal side of things, who may gain a benefit from a moving away from coal. Would have been good to include a few experts in coal resource and reserves generation to add weight to the findings.

* some numbers for the Australian data, which I can comment on appear a bit screwy, (they may be typos) eg 38.6Mt of hard coal reserves in 2005 (BHP alone produced 37.3Mt in 2005 financial year sourced form BHP production report)

* the drop in production appears to be approx 2030. This is getting towards the time when the further proving up of resources to reserves is not beneficial. Also the 90 year forecast of reserves assumes that no further work is done in proving up reserves, or advances in technology. I would not like to put any money on forecasting what will occur over that sort of timeframe.

From the supply side of things, mineral prices have been in long term downward trends, even though the easier deposits have been mined out. Costs have followed (or maybe led) prices down.

Mines have been using technology (eg larger equipment) to reduce costs and maintain profits. I saw (many years ago) a presentation where one mining company (Phelpe Dodge I think) charted the real price and costs, for copper over 200 years. Also shown were the technology that allowed the costs of production to drop to maintain profits. I'll try to find it.

Some data at the following links.

http://bigpicture.typepad.com/comments/2005/09/are_real_commod.html

When future production of coal does drop off, the demand for energy should see real prices rise (assuming there is no alternative energy source) & currently marginal coal deposits will be economic. Alternatives that are also currently not economic will also be economically viable to develop.

I believe that long before we run out of coal we will have moved on to the next major baseload source of energy.
Posted by miner, Monday, 6 August 2007 8:59:11 AM
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... indeed. The stone age didn't end because we ran out of stone.
Posted by xoddam, Monday, 6 August 2007 10:40:54 AM
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