Guest Post: The 2-Product, 2-Customer Wonder Called Australia

Tyler Durden's picture

Submitted by Alex Gloy of Lighthouse Investment Management

The 2-Product, 2-Customer Wonder Called Australia

Australia is the sixth-largest country (2.9m square miles) on earth, just a tad smaller than the contiguous United States (3.1m). They are a little short on people (22.8m), which comes handy, since they dig up their entire country and sell the dirt to China.

Australia has a remarkably low government dept-to-GDP ratio (29% ), low unemployment (5.2%), a moderate budget deficit (3.4% of GDP) and moderate inflation.

However, Australia has been running current account deficits of up to 6% of GDP for more than 50 years. The “mates”, until recently, didn’t like to save, hence most investment has to be financed by borrowing from foreigners.

I was curious as to how much of the success was due to exporting dirt to China. From the Australian Bureau of Statistics you get the following data about their top-10 export markets (accounting for 82% of all exports):

A bit more than half (50.2%) of all exports go to two countries: China and Japan. If you stripped out those two, there wouldn’t be much growth left.

The dependence on China and Japan has doubled over the last decade:

Over the last 12 months, total exports grew by A$ 35.6bn. Of that growth, 24.2bn, or 68%, came from China and Japan.

Let’s look at exports by product. Here are the top-10:

Two products (iron ore and coal) account for 47% of all exports.

Australia is a 2-product, 2-customer wonder. If either China or Japan has a problem, so does Australia.

To import a car (let’s say 2 tons, $30,000), Australia has to export 214 tonnes of iron ore or 248 tonnes of coal, leading to unfavorable the terms of trade.

As Scott Grannis recently pointed out, the Australian dollar trades far above its purchasing power parity:

Putting all eggs in one basket will come to haunt Australia once Japan and China collapse under the weight of their debt. A much lower Australian dollar would then be needed to make other goods attractive for exporting.

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lolmao500's picture
AP Source: GM to call back 8,000 Chevy Volts


OP you forgot also that the Australian real estate market is MENTAL!

Gully Foyle's picture

They ended RUSH because the tax credit only ran 65 episodes so fuck em.

StockProdigy's picture

The exact reason I'm short Aussie Banks.

ihedgemyhedges's picture

by the way, they don't just export dirt.  they export Amanda Drury too......

kito's picture

funny, china buys australian dirt, which is then used to help china sell us their crap..................

Ahmeexnal's picture

which in turn is paid with worthless paper fiat....made from Amazon rain forest trees....chopped down to create open air gold mines....

kito's picture

@ahmeexnal.....which are then used to extract gold which is then bought by central banks so they can store it and manipulate the price in order to maintain fiat supremacy????.................

Bluntly Put's picture

Thus proving that central planning is still subject to the power of a pencil.

I pencil.


Mercury's picture

Daniel Defoe sought to rectify a similar situation in 1728 with A Plan For English Commerce - arguing essentially that England shouldn't be exporting raw wool and importing finished woolen goods from foreign nations. 

If you want your nation to prosper he wrote, restrict the export of raw materials and subsidise domestic finished goods industries.  Un-free trade basically.

It worked.

Vengeance's picture

I've been arguing the same thing about many of Canada's exports for years! No one listens or cares... Sad really.

redpill's picture

Regardless I don't think Australia is going to run out of people to sell commodities to.  Of all the countries in the world to be worried about the future of, Australia not very high on my list.

Mercury's picture

But they might run low on commodities to sell and in any case the argument is that you can turn a bigger profit as the value-added manufacturer.

redpill's picture

Run low on commodities?  Do you realize how big Australia is?

Not arguing that they couldn't do better for themselves than sell off all their commodities, just that the implied thesis of the Post is that Australia is on the brink of collapse because of Japan and China's problems and I just don't see it.

Mercury's picture

I suppose although surely the whole country isn't made of iron and they must have some environmentalists jumping up and down about mining.

In 1950 Saudi Arabia and S. Korea were pretty similar on paper. Half a century later S. Korea is much richer per-capita than Saudi despite Saudi's massive endowment of one key natural resource.  The difference (in a nutshell - MENA has lots of issues) is manufacturing.

kaiserhoff's picture

That's odd.  I didn't know "issues" meant total lack of a work ethic;)

Element's picture

Environmentalists are like the Abos, we entertain their silly views and behaviours, plus give them far too much time and undue consideration simply because we can afford to do so.

The typical hard-working Aussie will gladly export them as woodchips if we can no longer afford their obstructionism and ignorant lies and propaganda.

And yes, great tracts of the country and what lies under really is made of iron and coal and a lot of almost everything else, except for deep fertile soils and abundant water supplies (the opposite of the US situation) hence a much smaller population will persist than on that other continents, or we'll get a local version of the Horn of Africa, eventually.

Consequently, Australia will remain a particularly rich country, as long as the population does not grow too large.

GeneMarchbanks's picture

It's on the brink because of a massive RE bubble and high household debt. The trigger is irrelevant. Concentration of risk is very high, fragility as Taleb says.

Australia = one trick pony with no back up plan.

Lord Koos's picture

Even in a worst-case scenario, Japan and China will remain huge markets for raw materials for some time.

GeneMarchbanks's picture

You're optimistic. Probably a side effect from living there. Japan is an island with nowhere to expand to and massive demographic problems. Best years for Australia are over.

fnord88's picture

You are so right. When the shit hits the fan, who wants to be living somewhere with shit loads of food and energy. I mean the lights will be on, and bellies will be full, but nobody will have an ipad.

Squid-puppets a-go-go's picture

nup. When japan dies, India will fulfil the same role for Australia. We have customers waiting in line.

However, thats not to say we wont go to shit when Jap/china collapses. In the great depression America was as much a creditor to Europe as china is to America today. Did being a creditor spare the US from the worst of the depression?  Not on your life.

my point is that australia will hurt as much as anyone, but when the creditor nations come out of this thing (a decade ahead of america and europe), Australia is one of the few western nations that will bounce back with them.

When you see how small its government debt is, it has considerable capability, if invested wisely, to refurbish its economy 


that said, i totally dont deny the lack of wisdom of open market policy by which you export raw and import manufactured - you're never gonna win long term with that. So the trick for Australia in the post new depression is to restart its manufacturing industry and position its currency to affect that. Australia has not printed money like other countries - perhaps it should!

BigJim's picture

So exactly how does Australia "restart" its manufacturing industry?

Clearly, entrepreneurs don't think the return on capital worth their while, otherwise they'd be doing it. Oh! Wait! I get it! We''ll get the geniuses in the Aussie government to 'invest' other people's money on their pet projects... and then we can all stand around amazed as their projects fail.

Don't you guys ever learn?

Socratic Dog's picture

That is exactly what the plan is.  Little entrepreneurial ethos in Australia.  And with such a high aussie dollar, huge obstacles in the way.

Value added has been the plan for about 50 years.  Donald Horne wrote a well-known book in the '60s, I think it was, "The Lucky Country", saying basically what is being said here.

Saudi Arabia, or any other oil-rich basket case, is a fair comparison.

i-dog's picture

How do you create a small business in Australia? Give an Aussie a large one, then wait....

mac768's picture

they are not a primary target of long range missiles from the "axis of evil" :)

GeneMarchbanks's picture

Neither is the US, unless of course, it is instigated by the Duo-Death Dragon of MIC + Moneychangers.

Vergeltung's picture

my brother thinks the Australian Dollar is the answer to all things investment-wise. I should send him this article!

lemonobrien's picture

hey, I buys lots of Perth Mint golds and silvers.

UnpatrioticHoarder's picture

When the above customers and commodities fall apart Australia will just pull another couple of aces out of its sleeve, those being gold (2nd largest producer) and silver (one of top 5 producers). Gold at $10,000 and silver at $500..... no wuckers mate.

fnord88's picture

Plus I read in the paper this morning we have the highest per capita marijuana consumption in the world. And we make excellent beer. Whether today is better than yesterday only matters if you can remember yesterday. 

TGR's picture

Plus the world's biggest legal opium poppy operation in Tasmania, over a million feral camels, kangaroos in the millions, an undergound aquifier of immense proportions and seafood in abundance from the relatively clean southern ocean - if the world goes mad max, I can think of 192 other countries which might be worse off.

BigJim's picture

So can the Chinese. That's why they'll team up with the Indonesians, and invade.

Australia should get themselves some nukes now, while the US can still afford to be playground monitor.

TGR's picture

They won't team up given their systemic dislike for each other. If China ever thinks about expanding, it will go for Mongolia first, full of resources and right next door.


Element's picture

Australia should get themselves some nukes now, while the US can still afford to be playground monitor.


Australia developed everything it needed to manufacture nukes prior to ratifying the NPT in 1973 --and the Aust govt of the day told Washington that it would not ratify the NPT until it had achieved the ability make nukes in future as a safeguard against the NPT's widely predicted eventual failure.

Here's some of the current public evidence of just one of the later advanced uraniaum enrichment programs;

I have zero doubts that the ADF can put a fully-developed weaponised and miniaturised light-weight HEU tactical munition on multiple weapon systems and platforms -- within 24 hours.

What people don't realise is that the NPT and CTBT did not in any way prevent any country from actually designing and developing functional advanced nuclear warheads. If you developed the tech to produce the HEU and other tech, before you ratified the NPT, you thus also have the materials needed to make a prefabricated but non-assembled arsenal of them.

The only thing the NPT and CTBT do prevent a country doing is fully assembling a functioning munition, and also testing a non-zero yield nuke, or from 'proliferating' the technology to another country (selling the tech, or weapons, or doing deals with it, but which in the case of SILEX, is basically exactly what Australia did, anyway, only it was the USA that got the Tech ... in some still undisclosed series of bi-lateral deals and agreements).

The NPT and CTBT actually provided zero means to prevent a country like Australia from using its pre-existing pre-NPT enrichment tech to enrich uranium to weapons-grades, and then secretly storing up a large national stockpile of HEU, and 50 or so prefabricated and machined HEU fissile cores.

Such cores only need to be placed in an already fully-prefabricated and zero-yield tested warhead design. Most people also don't realise that a HEU weapon does not have to be a heavy 'gun-type' design, they can also be miniaturised in a 2-D or 3-D implosive core configuration, to get a big-bang out of a very much more compact and light HEU munition.

Indeed, such designs are many times safer and also far less detectable than any Pu weapon, and they don't get hot and damaged via Pu decay, so last for decades in storage before requiring re-manufacture.

Thus you can get a nuclear-armed state popping-up in 24 hours or so.

And that is without doubt the existing potential with regard to Australia's status - Japan also.

SILEX was released publicly under a US commercial licence, after formal DOE testing, simply so that other country's would fully understand the real situation, if they ever got funny ideas.

It also informed the US that it couldn't regard Australia as a disposable strategic pawn or call all of the shots all of the time, without regard to our strategic priorities.

So far this has worked out well, with no further need to hint at a nuclear potential or capability.

I expect that as US power declines, as it inevitably will now, the mutual 'alliance' with Australia will necessarily grow stronger, not weaken.

So the US will not rock the boat here, in this regard, and is actually very likely to indirectly assist Australia to prepare an effective independent strategic defence capability. That's the real-politic of the emerging strategic environment in Asia as Asian demand for resources grows, and European NATO rifts and flops, and the US recedes to the Pacific Basin and North Atlantic basins.

Oh regional Indian's picture

Coal and Ore. Karmically horrible. OZ is totally screwed anyways. They have had the most freak weather this past year. Draught and Floods in equal measure. Add the housing boom and a population that drinks just a tad too much and yuo have parent UK reflected through and through. Sports, Binge Drinking and hard jobs.

Sounds like a throwback to older, meaner times.



GeneMarchbanks's picture

I'm starting to believe the more a person is junked, the harsher the truth coming from their words, trolls aside.


fnord88's picture

Because if I want to listen to people talk about the karma of coal and iron ore I will hang out with my hippie friends. Wonder what he things the Karma of his caste system is? 

PeaBird's picture

I have a sneaking suspicion that ORI is just pissed off (that means "sour grapes" to our american friends), that the Indians got slaughtered by the Australians in the Sydney cricket test...hahaha. BTW reading ORI's comments on Australia clearly shows that there is very little depth of knowledge regarding the subject matter in his comments. We have read & lived all of those cliches & platitudes regarding Australia what's new?

Regarding ORI's comments trashing those who drink alcohol...I would trust a man that drinks alcohol, over a man who does not, any day... People who don't drink alcohol take themselves too seriously. People who take themselves too seriously are dangerous to others. Also, you can't enjoy a drink with them after a day's competition...because they don't drink...and they probably take themselves too seriously to be seen drinking & talking BS with competition...and that sucks.

falun bong's picture

I won't junk him, I'll just say I've lived here for 5 years and it's bloody f*cking marvelous. 5.3% unemployment, actual jobs available. Easy for my kids to find summer jobs. University for them will cost me about $1800 per year. I had a minor operation recently: superb care, cost me 1/10th of what it would in the USA (I checked). 4 proper weeks of annual vacation with no snivelling boss wondering where you are the day after Christmas. Employers required by law to put 10% of your pay in a separate account you own and can invest how you like. Best beaches in the world. Best fishing, diving, sailing, snorkeling in the world. Great restaurants and night life. F'ing gorgeous women.

Downside: property costs are very high, that's why i just sold and am renting. Stuff (washing machines etc) is very expensive. Rowdy bar fights, sure, but 1/4 the murder rate of the US.

Yes it's probably a two-trick pony but if you ask me the US is probably just 3-4 tricks maximum; 1. War; 2. Kardashians; 3. Financial "products" 4. Useless shit like Facebook. I'll take red dirt and black dirt anyday. OMFG they have enough to last a few lifetimes, a guy I know was in iron ore country, had a welding machine that tipped over and welded itself to the ground the ore was so rich. More mineral wealth per capita than Saudi Arabia by far. We packed up and left after Bush was appointed the second time, best decision we ever made.

myne's picture

SHHHHH!!! ;)

a guy I know was in iron ore country, had a welding machine that tipped over and welded itself to the ground the ore was so rich.

Bahahahaa that's gotta be one of the most ridiculous things I've read in a while! Well... Aside from statements by US Republican candidates.

I can barely imagine it, but I can imagine the look on his face! Hahaha!


Element's picture

I lived in the Pilbra for 18 months when boy, and drop a magnet in the dirt there and it literally comes up covered in a handfull of iron filings ... and that goes on for hundreds of kilometers. ... and thats the low grade stuff no one bothers to mine ... the high-grade stuff is up to 95% pure iron oxide.  Thunderstorms are fun when the ground and every hill is literally made out of conductive metals.

GoinFawr's picture

"The 'civilised' keep alive the territorial war. Erase the race that claim the place and say we dig for ore. Or dangle devils in a bottle..." -Kate Bush

TheSilverJournal's picture

China is set to boom when the USD collapses. When China sends us their real goods that took real work and real resources to makes, the US sends them pieces of paper from a printing press that took no real work, no real resources to make. When China figures out that that they're really getting nothing back in exchange for their goods, and they stop exchanging their goods for nothing pieces of paper, they're economy will explode.

Oliver Jones's picture

It's not as simple as that.

China has been busy spending their American-issued paper, buying up large portions of the world - such as Africa.

TheSilverJournal's picture

They've also been busy buying US Treasuries and stashing them as Chinese Reserves. The problem is they can never spend those US denominated reserves or the USD will tank, so those reserves are essentially worthless to China. Savings that can never be spent are not savings at all.

So it is as simple as that when counting the dollars that are received from shipping goods to the US that are wasted on US Treasuries.

aminorex's picture

China could not sell treasuries until QE, so they had to stockpile copper using current account surplus.  Now the fed keeps prices up via QE, so PRC can dump treasuries at will.