Effects of the Global Economic Crisis on the Western Australian Business Environment
Art der Uni-Arbeit: Bachelorarbeit
Autor/-in: Tobias Paul
This research project aims on answering
the question to what extend Western Australian businesses, especially in the
mining sector, have been effected by the global economic crisis. The main
trigger of the global economic downturn was the sub-prime crisis in the United
States in mid 2007 which still affects the world economy and global financial
To understand the complex interrelated
nature between financial markets and economic growth, the study is based on
theories of growth and decline of economies and the role of financial markets. In this context, main drivers of economic
growth in the era of Globalization theory will be subject to analysis. The emergence of global institutions, a
global marketplace and foreign direct investment are of major importance to
ensure stability and the development of a global economy.
Then, the focus is on Australia as a major
supplier of natural resources such as iron ore, gold, gas and oil. These
commodities play a significant role in economic growth for Australia and
represent the major share of Australia’s export earnings.
Historically, Western Australia has been
and still is the mining state and plays a crucial role in this context. Its contribution to total Australian
exports is substantial and is a driver of the Australian economy. The
development of the Chinese economy is of major importance to the stability of
Australia’s export-based mining sector and is one of the crucial drivers of growth.
An analysis of the development and course
of events of the sub prime and world economic crisis provides the basis for
explaining the effects to Australia's economy. This includes a consideration of
how and to what extend the Australian Government enforced appropriate measures
to avert a recession.
In contrast to most other developed
economies, Australia has not fallen into recession due to the implementation of
various economic stimulus packages worth over $ 70 billion. However, the
current situation implies that there are still significant downside risks for
the Australian economy.
The project also
examines how this crisis may influence the long-term competitiveness of
Rio Tinto, a major Australian mining
company, is used as a case study to reveal direct connections, if any, between
the world economic crisis and mining in Australia. The company is a heavy-weight in the
Australian Stock Exchange and has suffered more than 75 % in terms of loss of
share value from the global economic downturn despite superior operational
performance and strategic investments.
The scrutiny of the effects of the global economic crisis on Australia,
and particularly Western Australia show that the domestic economy has not been
immune to the shockwave of global financial and economic turmoil which was
triggered off by the US sub prime crisis in mid 2007.
findings can be categorized in five parts.
Australia and the
The analysis of the Australian economy reveals that the global economic
downturn has significant effect on the economy of Australia and Western Australia
as GDP growth deteriorated and demand for commodities decreased. However the
extend of decline in economic growth is not as severe as it is in other
developed nations. The intervention of the Australian Government and
Australia’s dependence on exports to Asian countries, mainly China prevented a
recession so far. Economies of developing nations suffered from the global
crisis to a lower degree.
Seemingly, a recession, two consecutive quarters of negative GDP growth,
has been avoided in Australia despite the uncertain global economic
environment. In December 2008, the Australian economy contracted for the first
time in eight years but has shown growth of 0.4 % in the first quarter of 2009,
being the only advanced economy which has avoided recession besides South
Australia’s banking system has prevented the Australian economy from a
severe collapse as mortgage securitization and large investments in sub prime
related assets have been undertaken to a far lower degree than banks in other
developed countries. By implementing adequate fiscal and monetary policies, the
Reserve Bank of Australia contributed to a stable business environment which
was enhanced by the Government’s various stimulus packages. These stimulus
packages proved to be beneficial for the economy as negative economic growth
could be avoided. This development however, will have negative long-term
effects on Australia’s national budget deficit which increased significantly
and will take years to be paid off. In terms of economic downturns and
decreasing GDP growth, these measures undertaken by the Australian government
seem to effectively support businesses and prevent unemployment rates from
surging. Evidently, these efforts counteracted igniting a vicious circle of
less employment, lower tax revenues and reduced governmental monetary resources
to stabilize the economy.
Unemployment in Australia surged to 5.7 % in April 2009, but declined to
5.4 % in May, implying that the economy has profited from the stimulus
packages. Although many companies, especially in the mining sector, used the
global crisis as pretence to retrench workers due to increasingly automated
Decreasing inflation brings down consumer prices, thus supporting
domestic demand which is likely to help stabilize the economy and restore
confidence among business- es and consumers.
A recently published Servcorp International Business Confidence Survey
which was conducted in April 2009 ranks Australia number one in regards to
which country will survive the global economic crisis best (Servcorp, 2009).
These finding highlight that despite the turmoil and uncertainty globally, the
Australian business environment stayed comparatively sound and stable.
Mining Sector in Australia
The conducted research shows that the mining sector is of major
importance to WA, but also Australia’s economy as a whole. WA’s economy has
outperformed the Australian economy in terms of economic growth constantly
since 2001, highlighting the growing importance of the state (cf Appendix
WA’s mining sector generated over $ 40 billion to the Gross State
Product therefore being the main contributor, followed by property and business
services accounting for just over $ 15 billion (cf Appendix Figure 33). Mining
exports account for almost 40% of total Australian exports, thus making the
mining sector a crucial part of ensuring sustainable economic growth for
Australia. Commodity export volumes showed different development during the
crisis; some increased while others, such as iron ore, decreased.
Despite significantly lower demand and world prices on
key commodities, WA’s economy retained profits during 2008 as earnings of
mineral resource increased by 45%. Especially petroleum production and exports
such as oil, gas and liquefied natural gas increased due to field performance
and extended capacity. The positive impact on earnings of some major
commodities was mainly due to the sharp depreciation of the Australian Dollar.
The vast mineral resources, mainly iron ore, gold and petroleum are key
strategic as- sets which will contribute to further expansion of Australia’s
economy in the long term. WA was amongst the biggest beneficiaries of the
commodities boom and extensive growth in China and other developing countries.
Symmetry would suggest that WA is therefore likely to be hit hardest within
Australia by the deterioration in commodity prices and lower economic growth in
China. Scrutiny of WA’s economic situation however reveals that the state’s
economy is in rather stable due to large mining projects and governmental
investments in infrastructure which are implemented in order to maintain
momentum. These strategic investments like the Gorgon project or the lifting of
uranium production ban are contributing to bypass slowing economic activity.
Due to previous times of high earnings and cash flows caused by high demand
and high commodity prices, larger companies in WA have still healthy balance
sheets and can survive the global crisis.
Government investments in infrastructure helped to overcome economic
underperformance particularly in the end of 2008, aiming on short-term relief
for businesses. China’s economic growth will play a crucial part for WA in the
long-term. According to the above mentioned Servcorp survey, China ranks number
two on a global scale of countries surviving
the global crisis best. This implies that one of WA’s main ex-
port destinations is likely to continue to grow
rapidly and thus drive future demand for commodities.
The fact that the Australian economy has not fallen into recession can
give especially WA companies the incentive to start investing. The current
development of cutbacks in total global exploration in mining is likely to
limit capacity and reduce production in the medium-term. As global demand for
commodities is likely to revive in line with in the global economy in 2010, a
supply deficit can lead to high commodity prices, what in turn restores high
profitability for the mining sector. Due to increased government incentives and
large investments in WA’s mining sector, Australia will have the capacity to
supply growing demand and thus be one of the main beneficiaries from the global crisis.
Despite slowing projected growth in WA’s mining sector, growth rates are
expected to range between 5 % and 6 %, thus maintaining supremacy in the
development of the states’ economy (Figure 34).
The negative global development also bears opportunities for companies
operating in WA. Companies operating in WA which have been plagued by labor
shortages will profit from cheaper labor and freer labor markets, lower
construction costs and a depreciated Australia Dollar.
Knowledge in mining operations and services are superior in Australia
and create a sustainable competitive advantage over global competitors.
Continuous innovation in mining IT and exploration provided main impetus for
economic growth which will most likely continue in the upcoming decades.
The S&P ASX XMM collapsed between mid September and end November
2008, as a result of deteriorated perception of value of the collective mining
sector as commodity prices and global demand plunged.
The S&P ASX 300 recorded extreme losses during that time too, but
the S&P ASX XMM lost disproportional in value. Growing fears of a long-term
global recession characterized by decreases in industrial production and
construction hit the mining sector substantially. The general uncertain and
intransparent financial and economic environment created a situation where
stock markets did not reflect actual asset values of listed companies. The
short-term drive for yield and profits in various sectors of the economy caused
a willingness to take high risk and neglect strategic considerations which
distorted financial markets around the globe. In this context value and risk
perception of market participants developed into extreme forms bringing the
global financial system to the verge of a collapse.
Traditionally the value of a share reflects “the extent to which
management is efficiently operating the corporation and maximizing shareholder
wealth” (OECD 2009b). The objective focus faded during the global crisis as
uncertainty and speculations determined the direction of share price development.
The spill over effects, from what started as a crisis in the US
financial market, to the real global economy indicate that there is a strong
relatedness between the two. However, the complex nature of the interdependence
between both components is difficult to discover and even more difficult to
predict. The findings indicate that in this particular global crisis the real
economy of Australia was adjusting downwards to a more moderate degree than the
financial market, which crashed within a short time. The perception of value is
reflected in financial markets immediately as shares are traded in real time and
chain reactions can lead to radical price movements. The real economy is
affected by this development in a delayed time horizon due to the fact that
companies cannot align their policies and investments at short notice. Decision
made will then in turn influence share development due to market participants’
perception of appropriateness of the reaction.
In this context, the research points out that the media plays an
important role as intermediary and information provider for all market
participants. Decisions are often based on media publications which state a
positive or negative image about a certain incident. Objectivity, reliability
and accuracy of provided information are critical elements which determine to
what degree shareholders’ perception of value is influenced.
The Rio Tinto case study reveals that market
participants’ perception of value is the main driver of share price
Prior to the crisis, share value developed in line with operational
profits as shares and earnings increased constantly. During the crisis however,
superior operational performance indicated by record profit, cash flow and
earnings and adequate long-term strategic decisions could not offset negative
value perception in the market, resulting in a sharp loss of share value.
Seemingly, short-term profitability is subject to
value appraisal of shares in the global marketplace rather than sustainable
The case study furthermore depicts how a specific mining company was
affected by the global economic crisis. Rio Tinto’s rising indebtedness in
particular led to significant reduction in share value as access to financing
became increasingly difficult during the peak of the crisis. Despite adequate
measurements, value deterioration could not be stopped for over six months. The
external environment dictated what pattern Rio Tinto share followed when the
The case study highlights Australian growing ties with China, which is
deemed to be Rio Tinto’s core market despite the dismantled investment of
Chinese mining company Chinalco. The Chinalco case underlines the
shareholders’ power in publicly listed corporations. Shareholders’ opposition
to the Board of Directors recommendation to support the deal led to
withdrawal from negotiations.
The negative trend of Rio Tinto’s share development, which started in
June 2008, indicates that mining companies have suffered significantly from the
global economic crisis. Mining companies are the first tier of global supply chains and are directly impacted by deteriorating economic growth of
industrialized and industrializing countries.
The current global economic environment still implies high uncertainty
which may cause a recession to evolve in Australia in the near future as significant
downside risks persist.
Generally, vast amount of resources, advanced knowledge of mining
companies, superior infrastructure, proximity to China and other emerging
economies and sound macroeconomic indicators in the Australian business
environment emphasize out- standing opportunities. Especially companies
operating in WA’s mining sector are likely to succeed in the global marketplace
and create sustainable growth for the whole of Australia’s economy.
Projections of the IMF of a longer period of slumping global growth than
expected are likely to cause world trade to decline, exercising great pressure
on the Australian mining sector which is driven by exports.
The findings confirm that the emergence of a global economy, facilitated
by extensive growth of global supply-chain networks and large inflows of FDI
into the Australia were the fundamentals of unprecedented economic growth in
the last decades. This development transformed WA’s agricultural-dependent
economy into a global- scale export-based supplier of commodities.
Global institutions like the WTO provided the framework in which
international trade was able to expand controlled and according to mutual agreements
of member states. This allowed business in the mining sector to become more
predictable and secure. Development of superior knowledge and innovation are
the basis of sustained economic growth.
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