03/08/2011 - 10:46

Cuckoo states push friendship to the limit

03/08/2011 - 10:46

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The success of the resources states is making things tough in the rest of the country.

THE rest of Australia laughs when debate in Western Australia turns to secession, but don’t be surprised if someone in Sydney or Melbourne soon suggests it might actually be a good idea to “kick the WA cuckoo” out of the Australian nest.

The reason for the reversal of roles, with the eastern states wanting WA to leave the federation, is that the resource boom here and in Queensland is killing the rest of the country.

The most obvious damage being done by WA and Queensland is the effect on the dollar as record shipments of coal and iron ore, combined with record prices, delivers the best terms of trade in 140 years, and the highest exchange rates in 20 years.

Miners can tolerate exchange-rate pain because of their high cash flows. Manufacturers, tourism operators and educational institutions cannot. They are been hit hard, laying off workers, and posting losses.

If it was just the exchange rate hurting exporters the damage might not be so profound, but there are other issues at work, making the success of WA and Queensland almost intolerable for the other states, including:

• interest rates poised to resume their upward trend, inflicting pain on homebuyers, and driving down activity in the construction sector; and

• industrial relations worsening thanks to unions being re-armed with new workplace laws, which permit strikes before negotiations, kill individual contracts, and permit re-unionisation of the iron ore industry.

That final point is yet to make headlines elsewhere in Australia, but it will because the rise of union power in the Pilbara and other WA mining centres means that wages, already high, will rise further and spread across the country.

Employers in the iron ore and natural gas sectors can afford to pay workers $150,000 a year, and more. Employers in Melbourne metal fabrication shops or Tasmanian salmon farms cannot.

But, under Australia’s new Fair Work laws, there is the real prospect of Pilbara wage rates, or perhaps a proportion of them, being demanded by workers elsewhere.

Boiled down, WA and Queensland are behaving precisely like cuckoos in a nest. We are eating what is meant to be shared by all the chicks, and growing fat while they shrivel.

What becomes interesting is how the other states react. We’ve seen attempts to attack the resources sector with higher taxes, and we’re now watching attempts to attack resource-sector employers by unleashing the unions.

None of that is likely to work because the states that have chosen to develop their resources (as opposed to those which refuse to encourage mining) are directly plugged into the industrial revolutions sweeping across Asia, with China leading the way and India wobbling along behind.

Demand for commodities from Asia is not going slow, meaning that Australia’s resource states will ride the boom for years, perhaps decades to come, first thanks to demand pull and then thanks to the sort of supply constraints already hitting copper production in Chile and coal output in South Africa.

Those new supply events mean that:

• commodity prices will stay high, even if demand growth slows;

• the Australian dollar will stay high;

• interest rates will remain the preferred economic weapon of the Reserve Bank even if it hurts housing and retailing more than resources, the cause of the ‘problem’; and

• industrial activity will spread from the Pilbara and Queensland into other states.

Sometimes living with success can be as big a problem as living with failure, and right now the success of Australia’s resource states is producing failing states in the south and east of the country.

That’s why talk of secession could morph into the failing states demanding a divorce.

What the slow-growth states need is a fall in the exchange rate, lower interest rates, and smaller wage packets – and they’re not going to get any of that while WA and Queensland scream ahead on a commodity wave that is showing few signs of breaking as supply constraints are layered over high levels of demand.

Big business costs

DESPITE BHP Billiton’s size and obvious success in some divisions, it remains astonishingly easy to be rude about the management mistakes made by Australia’s biggest company.

The coastal flats south of Port Hedland contain one of the best, a metal skeleton that once housed the company’s hot briquetted iron (HBI) plant, an investment which consumed $3.5 billion and never worked as promised.

Other mistakes, mainly from the 1990s, can be found in the copper, mineral sands and platinum industries.

But there are two other errors yet to be fully recognised by critics and shareholders of BHP Billiton, with one of them in the running for the biggest-ever corporate blooper.

Firstly, an error in the making, the company’s decision to plunge deeply into US shale gas via the $US12.1 billion purchase of Petrohawk Energy.

Since announcing the deal, the exchange rate has moved sharply against BHP, which sent good Aussie dollars over to the US in exchange for fast-depreciating US dollar assets, and that’s before looking at the flat (and falling) price of gas in the US.

But a likely winner in time will be the decision to oppose by all means the iron ore developments of Fortescue Metals Group – including the pettiness of not allowing FMG workers quick access to the company’s own port by refusing permission for an overpass across the BHP Billiton railway.

If BHP Billiton had joined with FMG in its early days and worked together on railways and ports it could today have control of half FMG’s 55 million tonne output, in the same way FMG has negotiated control over half of the output of BC Iron.

As FMG grows, and the management team running BHP Billiton’s iron ore division fumes, the theoretical loss will assume monstrous proportions, measured in billions of dollars of foregone profit a year – and all for the sake of being nasty.

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“Time is a great teacher, but unfortunately it kills all its pupils”
Hector Berlioz

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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