Hurting in a high-cost environment

No one in Western Australia needs to be told we have become one of the world’s most expensive locations, but two recent events highlight how the state has become so uncompetitive it is exporting mining jobs to Britain.

Rather than attracting skilled migrants from England, Scotland and Wales to work in the Australian mining and oil industries, workers from WA are now making the return trip because Britain has become a low-cost location with resources-friendly government.

More surprising than the relative cost structures of WA and the UK is the fact that mining and oil projects are back on the economic agenda of a region that once specialised in closing mines.

Former British prime minister, Margaret Thatcher, must be laughing in her grave at the thought of Britain redeveloping its coal resources, launching a world-class potash mining industry, and attracting Australian engineers and investors to its historic tin and tungsten mines in the south, and oilfields in the north.

Back in the 1980s, Baroness Thatcher copped severe criticism from British unions for closing many of the country’s coal mines because they had become too costly, and could not compete with coal imported from as far away as Australia.

The worm has turned, as was seen last week when it was reported that the Perth-based engineering firm Clough was planning to establish a new office in Scotland in response to WA’s high cost structure.

In theory, the Scottish office will provide back-office support for the head office in Perth and no jobs will be lost in WA.

That might very well be the intention, and the way the plan starts, but it will not take long to discover that work done here costs twice as much as that done in Scotland – which means Scotland is where the opportunities for bright young engineers will be found.

Further south, in the English county of Devon, an Australian mining company is redeveloping one of the UK’s more interesting mines, the Hemerdon tungsten project, which was last worked 70 years ago.

Three factors underpin the reopening of a mine that produces a metal used to harden steel: a strong market for tungsten; interest from customers who are concerned about Chinese dominance of what is regarded as a critical metal; and competitive costs that enabled the Perth company, Wolf Minerals, to secure funding for the project.

While Hemerdon is one of the mining world’s more interesting projects, it has never been a financial success, partly because the price of tungsten has historically been driven by the armaments industry (with the high melting point of the metal making it ideal for artillery and other weapons) as well as for steel-cutting tools and as a light-bulb filament.

The only times the mine has previously produced large amount of tungsten were during the first and second world wars.

But there is something even more interesting about Hemerdon than its British history – the near certainty that if it was located in WA no-one would attempt to redevelop it.

The only reason Hemerdon is being redeveloped, and Clough is opening a Scottish office, is because WA has priced itself out of the market; and while that is not a big issue during a boom, it is a very big issue during a downturn.

A period of painful adjustment must occur if WA is to reclaim its competitive advantage. Prices must fall for everything that goes into a business, from office rent to the cost of professional services and skilled labour.

There are signs that this is happening, and the lower value of the Australian dollar is helping with the re-pricing process, but there’s a long way to go for WA to again become attractive for resources-project developers.