Monthly Archives: September 2013

Booms and busts, what does the future hold for Mackay?

I’ve been in Mackay again this week, my third visit in about 5 years. And what a great place it is and what an interesting period it has been. Mackay is the regional service centre and port town for the Bowen Basin, an area with large volumes of coking (metallurgical) and thermal (steaming for electricity generation) coal.

Mackay is a standout “muscle town”, a moniker that was coined, I suspect, by well known demographer Bernard Salt, who is very good at finding a catchy name for a demographic phenomenon.

A muscle town is one that has seen rapid growth through a role as regional centre servicing a large mining area. So it is not the mine-site village. It is the ‘big smoke’ a couple of hundred kilometres away which has become the port (often literally) through which a mining region or a mining basin is accessed, and through which a vast amount of people equipment flowed during the construction phase of our current boom. I have added another aspect to the identification and definition of a muscle town – as being a place where population growth has not been accompanied by economic diversification. Instead, the economic mix (as measured for example by the spread of employment across different industries) is in fact narrowing, as growth is concentrated in just one or two dominant industries. This aspect makes it easier to identify statistically when a growing area might be categorised in this way.

In 2008 the data I had for Mackay was showing a rapid increase in net population, with new housing growth barely keeping up with demand. This was the early stage of the infrastructure investment phase of the mining boom when expansion of the Bowen Basin coalfields took off in response to strong world demand and very high coal process. By 2011 the rate of population growth had slowed somewhat in Mackay and its two neighbouring local government areas (where much of the actual mining was taking place) from 3%pa over 2001-06 to 1.4%pa over 2006-11. In that decade, however the region grew by almost 25%, with 34,000 new residents, and Mackay local government area itself grew by 27%, adding some 25,000 new residents. In just a decade that was a major growth spurt, cementing Mackay’s role and capability to be a regional services centre and one of the largest non-capital city populations in Queensland, being bigger than Gladstone and Rockhampton, and not far behind Cairns and Townsville.

High growth is a good problem to have, but the shortlist of woes in 2011 included rents and housing prices that were “way too high”, and an undersupply of housing in neighbouring areas (closer to the mines themselves). That undersupply was pushing people to live over the border in Mackay where housing was still available, and then drive-in drive-out to work. And high prices for in demand goods and services like motel rooms and hire cars which were making the tourism sector too expensive for actual tourists. The accommodation and services sector had moved to service transient workers rather than tourists. My message to the community was to be careful, to monitor the driver of the boom (mining expansion) knowing that growth would at some stage peak and then start to slow, and, if possible, for businesses not to have all their eggs in that particular basket. This was a difficult message to get across as many businesses at the time were stretched flat out keeping up with demand, with no time or inclination to think about managing different circumstances.

Two years later in 2013 I looked into the data and could see signs that the high growth period was slowing. Things like slower growth in employment and flattening of the number of new business entries in the area. But the community itself told me that I was 12 months late in my interpretation (probably right as the most up to date data I have is usually about 12 months old). In fact there’d been a sudden drop in mining related construction activity as early as mid 2012 as the big mining firms scaled back – particularly scaling back outsourced services and labour. Lay-offs and shrunk or cancelled contracts have become commonplace. And all this while the rest of Australia still debates whether or not the boom is over! I have no doubt that the next round of regional data available for Mackay will show more evidence of this – probably in falling employment numbers in mining, construction and mining services (or if not actually falling then a flatlining and end of growth), higher rental vacancy rates, lower prices for motel rooms and falling number of business entries and increasing number of business exits. Residents might even be able to get a plumber at short notice one day! We’ll see what the data says and I will write on this again to see if my fairly obvious predictions are correct or not.

In a broad economic sense diversification is seen as a hallmark of long-term sustainability, but in fact there’s nothing wrong with a narrowing of an economy through a boom time, so long as there is an understanding that this kind of growth is unlikely to continue, and that the players in the economy (businesses and government) are always looking ahead over the horizon to plan what they’ll do when the growth industries falter. Economics is known as the dismal science, and that is why economics almost always predicts that rapid growth like that described will at some stage falter. In the mining game the boom-bust cycle is based on demand-induced price rises which, in a free market world, will send prospectors and investors scurrying around to find and develop resources that have now become profitable. This behaviour gets repeated across all prospective areas from the Congo to the Bowen Basin, often with a common pool of international capital behind it, so that in due course new supplies come on stream to benefit from the higher prices. If demand does not continue to grow as fast, prices will fall back to longer term trend levels. In this highly simplified world view, each resources boom will be followed by a bust.

So a muscle town whose growth is built on rapid expansion in the resources sector and will at some stage see a slowing of growth in activity in that sector. And at a later stage the rest of the local economy will play catch up to bring the kind of diversification that is needed for the long-term future. This has been a cycle since the gold rushes in the mid 19th century and we should be used to it, but we tend to get caught up in the excitement of the upswing, and then to grumble and complain about the downswing. One of the best success stories I’ve come across in managing this cycle is from Ballarat. In the 1920s the town went into a slump (exacerbated by the big drop in gold mining activity after the turn of the century) and a group of wealthy townspeople decided to invest part of their gold profits into local manufacturing infrastructure. They invested well, and this local solution helped insulate the town from the worst of the Depression in the following years, and it started to grow again.

There are few mechanisms available to communities these days to salt away the profits from the good times and use them productively to avoid the lean times. Wealth generated by mining directly is repatriated to the international investors that bankrolled the capital investment needed to get the mine going. It is up to the locally-owned second tier assets of property, savings, superannuation and shares to fund investment in alternative economic infrastructure, and it takes a brave local investor to risk their capital in local projects these days.

What does the short-term future hold for Mackay?
The business community in Mackay is getting worried about an impending downturn. Will the lay-offs continue? Will many workers leave? Will turnover of non-mining businesses fall, and housing prices collapse? I don’t think the impacts in most parts of the economy will be too severe, and it will be important for the business community to retain some confidence, and not to talk the town down into a spiral.

Our model of mapping the impacts of an external shock – like a drought (this post) or in this case a drop in mining industry investment, suggests that it helps to categorise businesses into those more or less linked to mining activity, and those that are selling more or less essential goods and services. As mining volumes will stay high in the Bowen Basin, all the businesses providing support to the mines’ volume related operations will continue to do quite well – trucks will still run, tyres will be replaced, hydraulics repaired. But those businesses providing other services which are less related to production volumes and more related to expansion or more optional mining add-ons will be hit early and hard. Businesses providing mining construction equipment or services, surveying, labour hire and perhaps even training. The mining companies will be cutting costs by scaling back expansion activities and will most likely bring back in house some of the labour-related services they had to outsource when demand outstripped their ability to provide these services in house.

Beyond the mining-related businesses, the businesses in the Mackay economy providing daily and weekly essential goods and services will see their revenues capped by resident numbers and disposable income. So the behaviour of people laid off will be critical – will they get a redundancy, how will they spend it, and will they stay in Mackay or move on elsewhere? Some well-targeted research will be able to answer these questions, and with some data in the bag it would be possible to prepare a reliable map of what will happen through the regional economy over the next year or two so businesses can plan ahead.

Good information and good planning is the best way to avoid panic and stress in the wider business community. It will also ensure that confidence in the future means employers in less-affected industries will be able to offer the jobs that some of the laid off boom-time workers will be looking for to help them stay in the region. That’s a win for both sides, and a sound locally-driven response to smoothing out the peaks and troughs of being a muscle town.

Here’s a copy of the booklet on the region’s economy that we did for the Mackay Regional Chamber of Commerce Mackay Economic Report final