Wednesday, November 9, 2011

The Size of the Mining Sector

The mining sector is directly related to about 9 per cent of gross value-added (one way of calculating GDP - i.e. the production measure). But obviously the mining sector makes a bigger contribution than this through a range of indirect effects on other sectors of the economy, particularly construction.

In the Reserve Bank of Australia's August Statement on Monetary Policy they had an interesting little Box on "Measuring the Mining and Non-mining Sectors"
Measuring the output of any particular sector is difficult because of the numerous interconnections between sectors. In the production side of the national accounts, the ABS estimates gross value added (GVA, defined as gross output less non-labour intermediate inputs) for the mining sector, which, at around 9 per cent of GDP, is the second-largest single sector after finance and insurance.
However, this estimate does not include the value of output in sectors closely linked to mining production: for example, when Queensland coal production fell around the start of this year, so too did output of rail transportation and port services partly because coal exports had fallen. Furthermore, this measure does not include most investment in mining, which is typically attributed to the value added of the construction (and other) sectors.
Another approach uses data from the expenditure side. Based on a number of assumptions, it is possible to come up with alternative estimates of output in the mining and non-mining sectors, at least at the annual frequency. This is broadly the approach used by Statistics Norway in estimating ‘offshore’ and ‘mainland’ GDP. A simple estimate of output related to the mining sector can be obtained as follows[2]:
- the volume of resource exports, which is available at a quarterly frequency
- plus real investment by the mining sector, which is available on an annual basis in the annual national accounts
- less an estimate of the imported component of mining investment. Given that there are no official data for this, the estimates that follow are RBA staff estimates, based on data for total capital imports and information from liaison with mining companies.
Given the uncertainties, any results are best treated as illustrative. Overall, the estimates suggest that activity in the broadly defined mining sector represented around 14¾ per cent of GDP at current prices in 2010/11, with mining exports of 12½ per cent of GDP and ‘net’ mining investment (excluding the imported component) around 2¼ per cent.
These estimates also suggest that activity in the mining sector has grown at a faster pace than in the non-mining sector over the past three decades. Activity related to the mining sector has grown in real terms at an annual rate of about 5½ per cent over this period, while activity in the non-mining sector has grown at an annual rate of about 3 per cent. The gap between growth in the mining sector and the rest of the economy has increased somewhat in recent years after narrowing in the first half of the 2000s. Over the six years to 2010/11, annual growth in non-mining sector activity is estimated at around 2¼ per cent, versus growth in mining activity of 6¼ per cent.
There has also been significant divergence in the experience of industries outside the mining sector, with growth in some services sectors quite strong, but weaker growth in some trade-exposed sectors.
The RBA notes, however, that the contribution of the mining sector goes well beyond these measurements ... as does the contribution of the manufacturing sector. They are concerned with income effects, but there are also service industries etc. I'm on the lookout for an impartial estimation of these indirect effects (i.e. one not funded by the mining sector itself.)
It should be stressed that these estimates are based on that part of output that is directly related to the mining sector and do not capture the broader income effects throughout the economy. As the Bank has noted frequently, recent developments in the mining sector and in commodity prices have had a range of flow-on effects throughout the economy, including via wealth effects, higher dividend flows to households, higher tax and royalty payments to governments, and effects on the exchange rate (which have reduced the price of imported goods and services for households and businesses).
What the graphs show is the greater level of volatility in mining gross value-added and GDP.
as mining investment and exports continue to increase, growth in the non-mining economy is likely to remain slower than growth in overall GDP. As the structure of the economy adjusts to the large change in global relative prices, the increased size of the mining sector means that overall GDP will be more affected by any volatility in mining sector activity. This highlights the importance of data that will allow more detailed analysis of the mining and non-mining sectors.

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