20/08/2008 - 22:00

Downturn fears spark debate

20/08/2008 - 22:00


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There is fascinating debate currently underway over whether the global economy and commodities markets are heading for a major slide.

Downturn fears spark debate

There is fascinating debate currently underway over whether the global economy and commodities markets are heading for a major slide.

A national newspaper had a dramatic page 1 headline earlier this week, declaring "Fears grow of an end to boom".

It cited falling prices for gold, copper and other metals and quoted Access Economics' respected director Chris Richardson, who stated that commodity booms always come to an ugly end.

The world's biggest resources company BHP Billiton had a more sanguine outlook when releasing its bumper profit result this week.

It expects short-term global economic growth to slow as developed economies experience further weakening.

But, it believes emerging market economies - led by China and India - should remain relatively strong, and that their long-term economic growth will remain robust as they continue on the path to industrialisation.

One school of thought holds that even a modest slowdown in global growth will lead to a weakening of commodity prices, and in turn a sharp slowdown in Western Australia's resources-driven economy.

The hard heads at BHP, who have more riding on commodity prices than the rest of us put together, don't share this view.

BHP believes demand will remain solid and, crucially, supply side pressures will remain high.

"This has led to over-estimation of the supply side response and thus price outcomes regularly being underestimated by industry observers," the company said in its profit report.

"We continue to expect that commodity prices will be driven by long-run marginal costs of supply."

There is plenty of local evidence to support the contention that commodity supplies are heavily constrained.

Virtually every building and construction project in the country has faced substantial cost pressures, and in many cases dramatic cost blowouts.

This is a direct result of the resources boom - soaring iron ore prices feed into higher steel costs, soaring LNG prices are underpinned by historically high oil prices, and soaring labour costs are driven by the likes of BHP, Rio Tinto, Woodside Petroleum and Fortescue Metals Group, which are employing thousands of workers and contractors as they work furiously to expand their production capacity.

Getting a good reading on Australia's economic outlook is crucial for many reasons.

The business sector needs to understand the economic outlook so that informed commercial judgements can be made.

Just as important, policy makers in Canberra and the states need to recognise the economic trends so they can make informed policy decisions.

One of the big challenges for the business sector over the past few years has been convincing policy makers of the severity of the labour shortage.

It is now widely recognised that the shortage started with a handful of skilled trades and professions, but progressively spread to all pockets of the labour market.

Last week's federal government decision to institute a guest worker scheme for Pacific Islanders suggests that the penny really has dropped in Canberra.

If we step back and reflect on this policy decision, and put it in an historical context, it can only be described as extraordinary.

It is a dramatic reversal of the policy stance of just a few years ago, when the focus was exclusively on keeping people out of Australia.

The federal government, to its credit, has recognised that fruit crops and horticulture crops are literally rotting on the vine because farmers cannot find anybody willing and able to pick the crop.

The guest worker scheme has initially been limited to two farming regions on the east coast. There is merit in extending this to other parts of the country, especially as the big mining companies search harder for workers.

The introduction of fly-in fly-out services from regional locations like Busselton and Geraldton shows the lengths to which mining companies are going.

Occasionally a die-hard unionist will raise concerns about working conditions in Australia being undermined.

That was the sort of fear campaign that commenced when the use of section 457 visas started to become more widespread. Now the use of 457 visas is widely accepted and subject to scrutiny.

The critical analysis also ignores the fact that the "labour market adjustment" is not confined to within Australia's shores.

Resources companies and their contractors are turning increasingly to overseas suppliers for goods and services that traditionally would have been sourced locally.

LNG plants are being built in Indonesia, drafting work is being done in Manila and Kuala Lumpur and engineering design is being conducted in the UK.

Business models are changing, and it would be a brave policy maker - and an even braver business executive - who would try to stand in the way of these changes.


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