Implications Of Current Trade Theories On Australia’s Mining Industry

Industry Profile

Trade theories give a conceptual framework related to international trade and shifts in pattern of trade. Hence, both traditional and current trade theories consider some fundamental issues such as importance of international trade, trading partners, factors determining competitiveness and shifting of trade patterns (Baylis, Smith and Owens 2017). Initially, mercantilism theory of international trade was depended on wealth accumulation in terms of goods through enhancing exports and prohibiting imports. Later, Absolute advantage theory of Adam Smith stated that a country produced and exported those goods in which it had absolute advantage and consequently, produced efficiently compare to other countries. On the contrary, Ricardo developed its comparative advantage theory stating that a country produced and exported those goods in which it had comparative advantage and lower opportunity costs compare to other countries (Rodrik 2018). Moreover, the theory of factors endowment, developed by Hecksher and Ohlin highlighted availability of factors of production, viz., labour, land and capital in various proportions to various countries. However, current theories of international trade help a specific industry to determine it appropriate trading partner to expand the business further through making more efficient products than other firms. These theories consider more factors than other country-based traditional theories related to international trade. Hence, these firm-based modern theories of international trade consider country similarity, global strategic rivalry, product life cycle and National Competitive Advantage of Porter. The importance of these current theories related to international trade occurs because the international market for business has become more contested and complex (Chaney 2018). Moreover, various international business organizations are changing their business strategies to sustain within this dynamic market.

Hence, this report has intended to select an industry for understating the implications of these above-mentioned theories of current international trade in real field. Hence, the chosen industry is mining industry of Australia. The report will explain its institutional structure and recent history based on marketing orientation, global production, industry structure, financing and ownership along with regulations of government and other public institutions that monitor this industry. After discussing the profile of mining industry, the report can discuss about the way current trade theories can help to understand the industry.

Australia’s mining industry is referred as the primary one, which contributes significant amount to the country’s national income. The country conducts its mining activity across the territories and states, as according to the Minerals Council of Australia, 0.02% of total land surface of this country is impacted directly by mining. Some significant areas of Australia are Peel, the Goldfields and Pilbara regions from where the country receives large amount of resources and minerals like iron ore, aluminium, nickel, copper, opal, zinc and gold and so on (Bakker and Shepherd 2017). Moreover, the country also possesses minerals and natural resources like natural gas, petroleum, coal and diamond.

Current Trade Theories

Within the mining industry of Australia, a large number of companies like BHP Billiton, Adani Mining, Rio Tinto, Alcoa, Shenhua and Chalco amd other multinational companies operate their business. The country also has some other small public listed mineral and mining exploration companies and for this, the entire resource sectors have captured almost 20% of the Australian Stock Exchange (ASX) market through capitalisation (Hosseinzadeh, Smyth, Valadkhani and Moradi 2018). BHP Billiton is identified as one of the safest companies of mining in Australia, as it follows the high safety rating through implementing severe safety programs and guidelines (Trannum et al. 2018). However, according to the report of Deloitte, mining companies have experienced trouble to recalibrate (Huang and Staples 2018). This situation has occurred due to economic slowdown of China, as the country is one of the largest trading partners of Australia. However, in recent years, the economic condition of these companies is recovering gradually due to increasing demand for mineral, especially gold, across the world.

The Mining division or industry includes entire operations that extract hydrocarbons like oil and gas or minerals, explore for these and give a services with large varieties to firms that are engaged in these activities. Some of the mining industry products are coal mining, iron ore mining, extractions of oil and gas, mining of non-metallic mineral and exploration related to this industry along with other mining services (Marais et al.  2018). Industrial activities are also related to these products. Australia supplies hydrocarbon, mineral and non-mineral reserves that the Mining division of this country extracts for processing and selling. These high quality reserves lead the Mining division of this country to become competitive in terms of price across the world. This export-oriented industry expects to trade these natural resources in other countries by large amount to earn around 70% of revenue for the year 2018-2019 (Zhou et al. 2018). In addition to this, the industry also intends to increase its revenue at a greater proportion by 2023-2024 through increasing exports of natural gas by large extend. The performance of mining industry completely depends on the dollar value of Australia, pricing, capital investment, global supply trends and demand for these products in both domestic and international market. During 2018-19, the industry can earn AUD 223billion revenue through generating 165640-employment opportunity and 7326 businesses (Australian Mining. 2018). In this context, it needs to be mentioned that revenue of this industry declines over the last five years and consequently, annual growth of this sector between 2014 and 2019 becomes -0.8% (Mercer-Mapstone, Rifkin, Louis and Moffat 2018). However, China and India are developing their industrial sectors significantly and this in turn can lead the demand in mining industry to increase further. As a result, some well-known and large-scale multinational companies related to this sector start new projects through investing higher amount of capital and increasing mining volumes by large number across many industries. However, this increasing output has led the prices of some products to decrease by large amount over the last five years (Walsh, van der Plank and Behrens 2017). As a result, profit and revenue have become volatile, as production along with world price, exchange rate and export demand have started to change. The industry has some chief success factors with the help of which companies can sustain in the world market. Some of these key success factors of the industry are resource availability, effective cost control and proximity to transfer.

Australia’s Mining Industry

Investment in resource sectors may bring huge challenges, as the industry experiences the impact of dynamic market structure compare to any other industries. The markets operate their business in a cyclical manner through surging the decade-long commodity price and investing in new resource-based projects (Adler, Mansi, Pandey and Stringer 2017). Moreover, oversupply in international market also leads the prices to subdue during the medium term. However, the industry and government also experience some excellent opportunities for working together to innovate or open new resource markets for Australia (Simpson and Horberry 2018). However, it can be beneficial to mention that the resource market or Australia has some positive impacts for future and the benefits received from production phase of the resources will grow further. Hence, to respond with these challenges, the industry needs governmental supports along with proper rules and regulations that can control every activity of this industry.

The mining law of Australia states that the country the state has rights over the entire mining sectors. Every Australian states and the Northern Territory has implemented different legislative regime, which governs extraction of and exploration for minerals for their respective territories and state boundaries. Some of the primary legislative regimes, such as, Planning and Development act 2007, Offshore Minerals Act 1994 (Cth) and Mineral Titles Act 2010 govern mining industry in Australia (Macintyre 2017). The Minister of Australia has the responsibility to administer every legislative regime. To conduct commercial mining activities within a territory or state, each company needs to take lease. The application related to mining lease includes a development proposal, map and applicant’s operational and technical capacity along with financial information (Thomashausen,  Maennling and Mebratu-Tsegaye 2018). Hence, the mining lease grants some following rights:

• entry into the land reserved for mining
• Operating mining work of minerals including exploration and extractive work, construction process, disposal and refining facilities and infrastructural facilities
• disposal of minerals

• Rental payments
• Requirements of minimum expenditure
• Compensation payments to any occupier or existing owners
• Delivering annual report to respective department
• Environmental rehabilitation containing security bonds
• Waste disposal

Consideration process for some minerals in different states is different. For instance, it is not possible to extract iron ore from mines of WA without the written authority of Minister. Moreover, the country needs to follow some specific rules and agreements of trade for nuclear materials and rough diamonds, as the country is the member of World Trade Organisation. Australia only can export rough diamonds to those countries, which participate in the Kimberley Process Certification Scheme. Moreover, nuclear materials also experience strict export controls, imposed by the Commonwealth government, fallen under the Atomic Energy Act 1953 (Cth) (Candela 2017). Every state expects Tasmania and Northern Territory have distinct regime of legislation monitoring the recovery of and exploration for gas and natural oil.

Key Firms

Mining industry is considered as one of the five pillar of Australia’s economy, where other pillars are agriculture, manufacturing, education and service. During 2014, exporting prices for iron ore, coal and oil decreased significantly. Moreover, the mining sector of this country also moved from construction phase to the operation phase and consequently reduced the employment level. Hence, it can be beneficial to analyse the mining sector from its historic context. The mining industry is considered as the economic saviour, as it helps Australia from experiencing any economic downturn that rest of the world, especially, Europe, the U.S.A and other countries have experienced during the global financial crisis of 2007-2008. During 2000s, the country has experienced a robust growth in its energy and minerals sectors, which in turn has helped the country to earn huge amount of revenue through exporting these products. Moreover, the sector has also protected economic growth and jobs in Australia. In 2015, the sector has contributed almost 8.5% to the GDP of Australia and consequently has generated almost 2% employment opportunities (Mactaggart, McDermott, Tynan and Gericke 2018). However, the country has underestimated the contribution of mining industry, as it deals with primary products. Sometimes, downstream processing indicates that production is counted as manufacturing rather than considering it as mining output. During the financial year of 2013-14, this specified sector has paid taxes worth $ 12.7 billion along with royalties to the state government as payment for the minerals worth $10 billion (Considine et al. 2017). In recent years, the mining industry has contributed over 50% of total export earnings of Australia. Hence, the impact of robust mining growth has significantly influenced exports of Australia, for instance, the exports value of this sector increased from $ 63billion to $139billion, which is, over 120% between 2000 and 2010 (Syed, Grafton, Kalirajan and Parham 2015). According to the Department of Industry and Science and the Australian Bureau of Statistics, the specified country earned $195 billion in 2014 from energy exports and minerals (Maxwell 2018). From the following figure, it can be said that coal, iron ore and liquefied natural gas (LNG) dominated Australia’s export earnings from during 2013 and 2014.

Figure 1: Major mining export of Australia during 20113-2014

Source: (Maxwell 2018)

Due to higher concentration ratio, some large-scale firms like MMG Limited, Evolution Mining Limited, Mineral resource Limited and others have earned huge amount of revenues in June 2016. According to following figure, Mineral resources Limited, a iron ore company, was ranked third with operating revenue worth $ 1.2billion during this period (Statista. 2018). On the other side, MMG Limited was ranked first with operating revenue worth $ 2.7 billion.

Global Production and Marketing Orientation

Figure 2: Largest mining companies in Australia ( June, 2016)

Source: (Statista. 2018)

Moreover, contribution of mining sector to the country’s export has increased significantly over the year since 1950 while contribution of other sectors like services, manufacturing and agriculture have decreased over the period.

Figure 3: Exports of various sectors in Australia

Source: (Shafiullah, Selvanathan and Naranpanawa 2017)

After discussing mining industry of Australia, the report can explain the report with the help of modern theory of international trade. In this context, national competitive advantage theory regarding international trade can be described. Porter has developed this theory with its diamond model, where he has considered five chief factors, which are, firm strategy along with structure and rivalry, demand condition, related and supported industries and factor conditions.

Porter has provided the diamond theory related to national competitive advantage of international trade. According to this theory, role of home country is very crucial for an organisation to succeed further in the international market. This theory is called diamond because of its framework, which explains that each factor contributes significantly for succussing originations in international industries (Fang et al. 2018). Hence, these factors of Porter model are called the determinants based on the national advantage.

Figure 4: Porter’s Diamond Model

Source: (Fang et al.  2018)

The above diagram is depicted the diamond model of Porter mentioning key factors of the model. These factors can be described as follows:

Firms, Strategy, Structure and Rivalry:

Strategy along with structure and rivalry are considered very essential factors for the success of a company. These strategies assist a company to set new goals while structure helps to manage operations and rivalry helps these organisations to innovate new ideas. However, these strategies and structures vary country wise. Each firm has its own strategy that helps them to increase their export (Mulazzani et al. 2017). However, firms do not follow any strict rules to adopt any particular strategy. Moreover, it chiefly depends upon some factors presenting in the home country or in the importing country. These strategic decisions have significant impacts on future competitions for sustain in the market. In this context, rivalry also plays significant roles, as greater rivalry indicates greater competitiveness of the firm.

This condition indicates size and nature of the customers related to products in the domestic market. Strong demand conditions in the domestic market influence organisations to develop product quality of firms continuously, for instance, higher demand in domestic market can significantly influence demand for the product in foreign market (Estevão, Nunes, Ferreira and Muniz 2018). Hence, presence of such demand from the initial stage of production is very essential. According to Porter, market size does not influence a firm to enjoy comparative advantage. Rather, sophistication and intensity of demand play significant role for a company to experience comparative advantage.

Ownership and Financing

In the domestic country, supported and related industries related to particular product are considered as leaders. These industries assist the main organisation to innovate new production techniques at low cost. Moreover, the growth of other industries directly influences main industry to develop further (Mahirwe and Wei 2018). This implies that a firm operates in a market along with its complementary firms and competitors. Under an acute competition, each firm prefers to produce products with higher quality but with lower cost to survive in the market.

This determinant of Porter’s Diamond model considers all inputs that are required to produce goods and services. To carry out a business, some chief factors are required and these include labour and natural resources along with some advanced factors including infrastructure and technology. It is considered that a country can trade successfully in international market if it possesses all factors of production (Tsiligiris 2018). However, some countries possess specialised and advanced factors but experience trouble due to insufficient amount of basic factors. Hence, this condition shows that whether a country can utilise its factors of production completely or not.

Porter also has emphasized a couple of other factors like chance and government policies that provide more value to four main factors of Diamond model. Government policy affects these four main factors by implementing various deregulatory or regulatory measures. Moreover, government can control the supply of various resources through changing the tax structure on them (Wonglimpiyarat 2018). It can also encourage or discourage various supportive industries by providing incentives or disincentives, respectively. Similarly, chance related to events like war or some unknown events like innovations and inventions discontinuities the input supplies and this in turn can cancel out the advantages of competitors.

However, Porter’s model has been criticised from various aspects. Firstly, in many situations, absence of any factor related to Diamond model cannot influence competitive advantage of any company. For instance, when a company exports its total product in other countries, then demand intensity in domestic market cannot play any significant role. Secondly, a country may not possess any domestic supplier of inputs for production. In this situation, backward linkage of other firms will be meaningless (Konsolas 2017). Thirdly, national competitive advantage theory of Porter depends on empirical findings based on 10 countries considering four major industries. However, economical condition of a country may differ from that of others and consequently, the finding of Porter may not support other country’s economic activities (Ochoa, Lara and de la Parra 2017). Fourthly, available amount of natural resources cannot achieve competitive advantage for a country, as to achieve this other factors are also required. However, it is seen that some Canadian industries have expanded their business based on their available natural resource. Fifthly, Porter has experienced that domestic market size influences the demand for products and this can help the country to attain competitive advantage. However, some companies also have developed their business with the help of foreign consumers.

Government and Regulation

After discussing about the concept and criticism of Porter’s Diamond model, the report can discuss about the value of this model in present context of international trade. It is observed that Porter’s national competitive advantage theory related to international trade possesses various limitations (Mathewson et al. 2017). However, these cannot reduce the economic significance of this theory even in the modern era. Through discussing mining industry of Australia in the context of Porter’s Diamond model, this statement can be proved.

Australia also experiences comparative advantage to produce products from mining industries and that can be supported with the help of Porter’s Diamond model. Some leading international firms under this industry follow standard production strategies through providing safety to their workers and using new technology for producing products with comparatively lower costs. Moreover, these companies have produced products with higher quality and ample amount to exports in foreign countries and they have successfully offset the increasing demand for minerals in international market. Moreover, these companies innovate new technologies to reduce life risk and any uncertainty related to mines. Some large companies dominate the entire mining industry of Australia and consequently, oligopolistic structure can be seen over there. Thus, strong rivalry among firms helps them to become more competitive. Demand for mining products in international market is also huge. China and India chiefly import coal and other natural resources from Australia while the U.S.A and other western countries also import significant amount of resources from this country. Thus, increasing demand in international market has also helped firms under mining industry to become more competitive. For mining industries, the requirement of related and supported industries is comparatively low compare to other industries. For this sector, huge amount of both skilled and unskilled labour is required. In addition to this, the sector requires modern machineries to extract, refine and produce modern resources. Australia is a modern industry and for this the mining sector can purchase modern machineries easily without exporting these from other countries. In addition to this, huge amount of labour immigration in this country can easily reduce the requirement of workers with lower wages. Thus, factor conditions are also developed.

After analysing these four factors of Diamond in the context of mining industry, the report can further analyse about the government policies and chances. The government of this country has implemented various policies to control and secure the mining industry of Australia. The government chiefly focuses on safety issues of this sector. For different regions of Australia, the government implements different rules and regulations. These policies discuss about various aspects related to international trade. In addition to this, Australia has chances to develop its business further, as the demand for coal and natural resources in international market is increasing continuously.

Industry Structure

Conclusion:

After discussing the entire mining industry of Australia and new trade policies, the report can conclude the entire discussion. The mining sector of Australia has played significant role to develop economic condition of this country. However, over the last few years, companies under this sector have experienced continuous decline. At present, demand for these mining products in global market is increasing gradually chiefly in China and India. This industry is discussed in the context of Porter’s diamond model. According to this model, it is seen that Australia has comparative advantage to trade these minerals and non-minerals in other countries.

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