05/09/2006 - 22:00

Boom could consign the bust to history

05/09/2006 - 22:00

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Premier Alan Carpenter and federal Resources Minister Ian Macfarlane don’t seem to agree on very much, but there is one issue on which they share a similar outlook.

Boom could consign the bust to history

Premier Alan Carpenter and federal Resources Minister Ian Macfarlane don’t seem to agree on very much, but there is one issue on which they share a similar outlook.

Both men have expressed concern about ‘life after the boom’ and the risk that Australia, and Western Australia in particular, will become overly reliant on the resources sector.

The recent closure of several long-standing manufacturing operations in Perth – at Canning Vale Weaving Mills, Australian Fine China, Amcor and Gosh Leather – seemed to highlight the risks facing the state economy.

And Woodside chief executive Don Voelte has warned that the resources boom itself faces serious challenges and planned projects may not proceed (see page 14).

The pressures facing the WA economy are a direct result of the resources boom, which is unprecedented in its scale and duration.

The boom has featured record business investment, leading to record economic growth and an unemployment rate of just 3.1 per cent. It has also created pressure points right across the economy.

Labour costs are on the rise, as is staff turnover, which in turn is forcing companies to spend more to retain existing staff or recruit and train new staff.

Shortages of skilled labour have emerged in many sectors.

The latest CCI-BankWest survey of business expectations found labour shortages were an issue for 70 per cent of WA businesses.

Despite a renewed training push, the shortages are likely to get worse as the workforce ages.

Mr Voelte cited just one example in a recent speech; he said it was estimated that between one third and one half of today’s oil and gas engineers are expected to retire by 2010.

The resources boom is underpinned by soaring commodity prices, and that feeds back into higher costs for local industry.

In particular, the jump in iron ore and nickel prices has fed into higher steel prices.

The international market price for LNG has also jumped in recent years, prompting gas producers such as Woodside to seek higher prices for their local gas sales.

That is one reason the state government wants to insulate local industry by forcing gas producers to reserve up to 20 per cent of their reserves for the domestic market.

The resources boom has encouraged many people to move to WA in search of work or a higher income.

That has bolstered demand for land and housing and, combined with speculative investor interest, helped fuel the 35 per cent surge in Perth property prices during the past year.

While surging property values are good news for investors and other property owners, they could deter people from moving to WA.

There isn’t much value moving the family to WA in search of a higher paying job if the extra income is swallowed up by higher rental or mortgage payments.

For traditional industries such as manufacturing, tourism and agriculture, these trends have mostly made life more difficult.

The cost and skills pressures in WA have also encouraged some of the big resources companies to send engineering and construction work overseas.

Despite that, the North West Shelf Venture has still been hit by a 21 per cent cost blow-out on its Phase 5 expansion project, now expected to cost $2.4 billion.

Other big projects, such as BHP Billiton’s Ravensthorpe nickel mine and CSBP’s ammonium nitrate plant expansion, have faced even larger cost increases.

All of this appears to present some cause for concern about WA’s prospects when commodity prices – which have underpinned the current boom – start to turn.

Access Economics believes a fall in commodity prices is inevitable – not because Chinese demand will collapse, but because increased supplies of iron ore, nickel and other commodities will eventually swamp the market.

“The traditional cycle has not changed,” said Access director Chris Richardson, adding that a fall in project investment would have a cascade effect through the economy.

Access expects WA’s economic growth to slow gradually, with the fall being cushioned by the increased export capacity being put in place by companies such as Woodside, BHP Billiton, Rio Tinto and Alcoa.

However, Mr Richardson has warned there could be a sharp correction.

“I don’t think you are recession proof,” he said.

Chamber of Commerce and Industry chief executive and former under treasurer, John Langoulant, takes a much more positive view of WA’s prospects.

“The diversity and breadth of the economy is such that it is more resilient,” he told WA Business News.

“We will still get cycles of growth but they will not be of the boom-bust type we have had in the past.”

Mr Langoulant said the growth in mining and resources had occurred across a wide range of commodities, which meant a downturn in one sector could be offset by continued growth in other sectors.

He also believes the increased scale of the resources sector, and the ownership consolidation in some sectors, particularly gold mining, will also deliver more stable growth than WA has seen in the past.

In addition, Mr Langoulant said the resources boom had contributed to the growth of other sectors such as construction, engineering, and downstream processing of mineral and energy resources.

“There also exists a growing number of small and medium-sized businesses that service WA’s resources sector in the areas of engineering and design, geophysics, fabrication and construction, training, electrical engineering, asset management and development,” CCI wrote in a submission to federal parliament’s Inquiry into Australia’s manufacturing industry now and beyond the resources boom.

“Caution should accompany any characterisation of WA’s present economic growth as either being somehow acutely susceptible to sudden downturn or narrowly based,” CCI added.

Mr Langoulant believes the growth of the mining services industry is the great untold story of the WA economy.

While engineering, consulting, drilling and mining contractors are at the forefront of mining services, this sector extends much further.

The reality is that many lawyers, accountants, bankers and brokers are directly reliant on the resources sector for their livelihood.

The growth of these white collar services firms has been aided by the increasing number of corporate headquarters in Perth.

Chevron and Newmont Mining have moved their regional office to Perth, while BHP and Rio have progressively moved more senior people to Perth.

Speaking at an oil industry conference this week, Ernst & Young partner Angus Walker said people who predicted in the mid 1990s that Perth could become a major oil and gas city were considered “ambitious”.

“But look where we are now and look at where Perth is heading…and look at the opportunities that will come with that,” Mr Walker said.

“Perth has undoubtedly become a centre of excellence not only for the oil and gas industry, but for the resource sector as a whole. In fact, Perth could already be considered a resource industry hub.”

The prosperity of most mining services firms is tied directly to the health of the local resources sector, but the sector’s horizons have widened.

Engineering firms such as GRD Minproc and Lycopodium are the main contractors on big mining projects in South America and Africa, while drilling contractors like Ausdrill have also expanded into Africa.

Mining consultants including Snowden Consulting and RSG Global have built a global reputation, while mining software firms Maptek and Surpac Minex, which operate from Perth, are world leaders in their field.

Kwinana fabrication company Ausclad Group illustrates how Australian firms can cope in traditional manufacturing activities.

It was the first WA company to build an oil and gas jacket for export, to New Zealand, and recently built a biofuels plant for a project in Darwin.

These contracts are in additional to the work it has done for many WA projects.

Engineering firm Clough is another example of a WA business that is exporting its expertise, working on projects in Saudi Arabia, India and New Zealand.

Another cause for optimism is the unprecedented increase in the amount of money committed to research and innovation in the resources sector (see story this page).

Mr Langoulant sees this is more evidence of the maturing of the WA economy.

For CCI , the policy out-take is to be wary of any calls for government assistance.

“The economic diversification which is accompanying the present export growth in WA also demonstrates that any view that the impact of global competition requires direct government assistance for the manufacturing sector should be treated with caution,” it said.

The state government has attached a lot of weight to the development of new industries to deliver more economic diversity.

Science and Innovation Minister Fran Logan has nominated biotechnology, information and communication technology, biofuels and marine and defence as the preferred growth sectors.

Mr Logan believes WA has a competitive edge in each of these sectors.

ACIL Tasman director John Roberts puts these industries in context when he says: “There are some good niches there but I don’t think any of those would save us from a major downturn.”

It is notable that Perth is home to at least five listed biofuels companies – Australian Ethanol, Australian Renewable Fuels, Jupiter Biofuels, Sterling Biofuels and Mission Biofuels – which have already raised or plan to raise more than $300 million.

However, with the exception of one small plant built at Picton with substantial government assistance, all of these companies are planning to invest overseas.

Mr Langoulant would rather see the focus shifted elsewhere.

“A better way of diversifying is to grow off your areas of comparative advantage, resources and agriculture,” he said.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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