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Mining boom evolving – not dead

The death of the mining boom has been greatly exaggerated, says RBA governor, Glenn Stevens.

While the terms of trade have peaked, the mining boom is evolving as expected. Mr Stevens says there are three phases to the boom. The first was the rise in prices, which began in 2004, and peaked more than a year ago. We saw that with iron ore and coal prices, with iron ore hitting a peak of US$190 a tonne, while coal prices peaked at close to US$180 a tonne in 2008, before falling below $100 in 2009, and then recovering to around US$140 a tonne in early 2011. Since 2011 though, coal prices have resumed their downward trend and are currently around US$80 a tonne.

Related: Looking into the future of mining

The second phase of the boom is the rise in capital investment, aimed at taking advantage of the expected (and continued) rise in demand for iron ore, coal, natural gas and other commodities. Governor Stevens believes mining investment will peak in 2013 or 2014. In the coal sector, we may have already seen the investment peak, with many coal miners like Yancoal Australia (ASX: YAL) cancelling expansion projects.

The third phase is when the capacity to extract and export higher quantities of resources is actually used. Mr Stevens believes this has begun for iron ore, but is still mostly ahead of us. We’ve seen evidence of that with Rio Tinto Limited (ASX: RIO) ramping up production to 353 million tonnes by 2015, while Fortescue Metals Group Limited (ASX: FMG) is targeting production of 115 million tonnes per year in 2013. Even BHP Billiton (ASX: BHP) is expanding its iron ore production, by optimising the inner harbour at Port Hedland, to allow for greater export volumes.

Governor Stevens also said that while it was evident that China had not crashed, but it is unlikely that we will see a return to double-digit economic growth. Mr Stevens added that China’s economy is three times the size it was 10 years ago and growing at 7% in 2013 adds more to global GDP than China growing at 10% in 2003.

The Foolish bottom line

The main issue is the uncertainty of what will happen to prices as increased supply comes online, not just from Australia but globally, and as China experiences slowing growth.

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Motley Fool writer/analyst Mike King owns shares in BHP Billiton.  The Motley Fool ’s purpose is to help the world invest, better.  Take Stock  is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  Click here now  to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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