Activity 7k: The 3 phases of a mining boom
- A boom refers to a period of rapidly rising prices or output/activity.
- The most common example of a boom relates to the boom in the property market that has occurred over recent years, primarily in Melbourne and Sydney. For example, property prices in the cities increased by more than 20% over the course of 2016.
- Both the prices phase of the mining boom and the production phase of the mining boom resulted in an increase in mining income or the ‘value’ of mining output. However, the prices phase of the boom referred to the period where the price of mining commodities (e.g. iron ore and coal) rapidly increased. This helped to increase the value of mining output because any given quantity of mining ore sold on world markets was sold at a higher price which necessarily resulted in more value (P X Q) and increased income. In contrast, the production phase of the boom referred to the period following large scale mining investment which expanded mining capacity and enabled a significantly larger volume of ore to be extracted from the mines. This also helped to increase mining values (P X Q) and income; however, the increased value/income came from greater volumes (i.e. Q) rather than higher prices.
- This is because mining companies were receiving higher prices for mining exports which meant that the value of exports necessarily increased. Other things being equal, this helped to boost net exports, which had a favourable impact on the balance on goods and services and therefore contributed to the reduction in the current account deficit.
- The investment phase of the mining boom followed the period of booming prices, where minors sought to capitalise on the higher prices by investing much more in mining capacity (e.g. building new mines and investing more in mining equipment). This added to AD and real GDP in the economy by the contribution to investment (as a part of AD). During this investment phase, no additional output was able to be produced until the new mines/upgraded equipment was fully operational. It was only once the investment was complete, and mining capacity was expanded, that the production phase of the boom commenced. Consequently, the production phase followed the investment phase and the way each contributed to economic activity was also different. As mentioned above, the production phase contributed to economic growth by the increase in mining volumes. The investment phase contributed to economic growth via the increase in investment demand as a component of AD.
- Given that mining companies were able to increase export volumes, it had the effect of increasing mining export values, which had a favourable impact on the balance on goods and services and therefore contributed to the reduction in the current account deficit. [This is even despite the fact that commodity prices fell. The beneficial effect of larger export volumes tended to outweigh the negative effect of lower export prices over many periods].