The Australian Financial Review published an article on the 30th May 2012 titled “Boom under threat from higher costs“. The article discussed the findings of a report by Port Jackson Partners and commissioned by the Minerals Council of Australia. The body of the article continued in much the same vein as the title, highlighting that high labour, energy and transport costs have made Australia “among the most expensive in the world to develop”.
The authors continue to dutifully report that “the resources industry hopes the report will help shift the debate from spreading the benefits of the resources boom through taxation to lowering costs for the industry”. In the words of Mitch Hooke, chief executive of the Minerals Council of Australia:
The MCA is urging the government to shift gears from spreading the benefits of the boom [through higher and ineffective taxes such as the carbon tax, ad hoc spending, and increased regulation] to tackling the real challenges of fiscal sustainability, productivity growth, expanding supply-side capacity and enhancing the economy’s structural flexibility.
It’s hard to know exactly what the MCA wants from this short quote, but basically they seem to be asking for lower taxes, less regulation, and greater availability of cheaper (potentially foreign) labour. Hardly a surprising a request for an industry body.
This article and the ensuing attention on the plight of the miners facing ‘increased costs’ spilled over into an article in The Age the following day (yesterday), “Gillard takes on mining bosses“. It’s a pity really because behind the fog of the news is a very interesting piece of research by Port Jackson Partners that tells a more nuanced story than has been reported. And here’s what we learnt when we passed the news filter and went straight to the source, the summary of PJP’s research entitled “Regaining our competitive edge in minerals resources”.
Let’s begin with the summary, PJP make four main points here:
- Developing world transformation continues to deliver sustained demand growth.
- Capturing this means growing volumes – the ‘free kick’ from price is over.
- As competitors multiply, our declining competitiveness means we will not capture our fair share of these volumes.
- Regaining our competitive edge will require immediate and coordinated effort.
PJP’s research shows a number of things, none of which should be surprising to an economist, or anybody for that matter.
- Australian mining projects are becoming ‘high cost’ projects on a global basis.
- Capital costs to build new mines and facilities are higher in Australia than the rest of the world.
- Projects face increasing delays.
- Competition is increasing with projects being developed around the world.
Let’s stop there for minute and get a better understanding of who exactly Australian mining projects are competing with. Countries listed in the PJP presentation as competitors and alternative sources of minerals include:
|
Corruption Perceptions Index 2011 |
Ease of doing business index 2012 |
GDP per capita PPP 2010-11 |
| Australia |
8 |
15 |
$40,200 |
| Canada |
10 |
13 |
$40,500 |
| Chile |
22 |
31 |
$17,200 |
| The Middle East* |
40 |
37 |
$54,200 |
| China |
75 |
91 |
$8,300 |
| Peru |
80 |
41 |
$10,000 |
| India |
95 |
132 |
$3,700 |
| Indonesia |
100 |
129 |
$4,600 |
| Kazakhstan |
120 |
47 |
$13,000 |
| Zaire/Democratic Republic of Congo |
168 |
178 |
$348 |
| *Used an average for Saudi Arabia, Qatar, UAE and Kuwait |
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I’ve taken the liberty to add to the list the rankings of each country on Transparency International’s Corruptions Perception Index and The World Bank’s Ease of Doing Business Index, as well as data for gross domestic product (GDP) per capita. Given that list, it’s really not surprising that Australian mining is not as competitive.
Australia has had such a good run until now because we were in the best position to scale up short-medium term production – our industry already existed, we’re an easy place to do business, with low corruption. Global deposits were less accessible in the short term than Australian ones, so we got a kind of ‘first movers’ advantage.
As this happened and prices skyrocketed, alternative sources became attractive and since minerals don’t choose their national state, we just lucked out in ending up with competitors in some of the least regulated, corrupt and low cost countries in the world (no offense to all my friends in those countries).
In addition, since the highest returning deposits are already being used, expansion in Australia will increasingly be to higher cost and lower return deposits. Basically, we’ve eaten – or are eating already – the low hanging fruit and it’s time to get the ladder.
Out of this analysis, PJP came up with a table of “policy considerations”. I’ve recreated the two main parts to it below.
| What |
How |
| Acknowledge our loss of competitiveness and its implications |
More openly disclose the magnitude of risks to the current project pipeline |
Translate pipeline risk into standard of living impact
(This includes describing the broad-based contribution mining has already made) |
| Alleviate exchange rate pressures |
Maintain meaningful federal and state fiscal surpluses for the foreseeable future |
| Resolve infrastructure bottlenecks that are driving inflation |
| Rebalance capital flows through an offshore focussed, ‘tamper proof’ sovereign wealth fund |
| Address labour and skills shortages |
Get more tonnes per person by focussing IR regulations on pay and work practices, |
| Ease labour and skills shortages by increasing internal mobility and 457 visa-style migration arrangements |
| Resist the current drift back to protectionism |
Avoid 1970’s-80’s style local content policies and piecemeal protection of already lagging industries |
| Revive the national productivity agenda |
Refocus workplace relations on ongoing productivity gains and acceptance of the need for change |
| Better match education and skills training, not just at universities, to emerging capability gaps |
| Foster the development of an innovation cluster; over time, this can become a growth engine itself |
| Incentivise research and commercialisation through R&D tax concessions |
| Eliminate sovereign risk concerns |
Stabilise taxation at predictable, internationally competitive levels |
| Streamline and simplify review processes to ensure transparent, predictable and timely approvals, including FDI and land use |
To me this table is a particularly interesting one. That neither AFR or The Age seemed to discuss, despite its many interesting points. I’ve highlighted in bold one that I found particularly interesting, the support for a sovereign wealth fund to ‘rebalance capital flows’. Discussions about currency manipulation aside, I think this is an excellent idea and I was surprised that no papers went with the headline, “Miners support sovereign wealth fund”.
There are many other interesting points of discussion from this table and other analysis by PJP, I’ve tried here to shed a bit more light on the sophistication and nuance behind shrill headlines such as “
Boom under threat from higher costs” and “
Gillard takes on mining bosses“. All too often measured analysis is hidden behind this fog of the news and as a result, public debate is less informed and less constructive.
The presentation ends with three simple and somewhat predictable conclusions for research commissioned by an industry body.
- Australia’s minerals resources remain fundamentally attractive – if we get their development right they will deliver enormous benefits to Australia
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- Getting this right means delivering new volume from projects that are more attractive to investors than those of our rapidly multiplying competitors
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- Right now, we are not well positioned to attract investment. Without change, we will be left behind as others grow
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Looking at things a bit more broadly and taking our diggers hat off for a minute, I think there are several other more interesting conclusions to come from this research, here are my thoughts:
- In the business of raw extraction Australia faces competition from some stiff competitors with a very low cost base. However, what we do have is good information, laws and institutions.
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- Companies serving the mining industry should be well set to benefit from expansion of raw materials extraction overseas as their expertise and equipment is purchased as inputs.
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- Australian companies are involved in much of the offshore expansion in mining in Africa and Asia, given our expertise in resources. As long as some of the benefits of this flow back to Australia, Australian companies will still be profitable.
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- Capital goes where the risk and return are favourable. What Australia lacks in return is for the moment compensated by decreased risk due to good information, laws and institutions.
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- Australian skills in mining and resources should continue to be a priority, focusing in particular on higher value research, design and engineering roles that are a global commodity – as is education and training in this area.
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- Addressing this issue by reducing regulation and taxes would only prop up an industry that has passed through the golden years and faces a fundamentally different competitive landscape. This would be akin to propping up garment manufacturing in the 1970s and 80s by reducing taxes and letting them get around minimum wage laws.
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So the next time you come across a claim based on research commissioned by an industry association, it might pay to read the original research and not the article in the paper. You might just learn something.
