Living in a fool’s paradise

Is it possible to be safe and profitable at the same time?

Perhaps, but the great experiment in maintaining Western Australia’s isolation from the rest of the world as a form of protection from an outbreak of COVID-19 will eventually have a cost.

Right now, most people in the state are happy with the hard border, and it’s the public response that is encouraging the government to hold the line.

However, even the most enthusiastic isolationist will eventually recognise that it’s not possible to live in a cocoon in perpetuity, especially an Australian state that is more connected to the world of international commerce than any other.

Some sections of the business community, which has been a strong supporter of the hard border, are starting to experience problems, such as staff shortages, and it might not be long before the property market is hit by a slowdown in population growth because the migration tap has been turned off.

Government revenues, swollen by sky-high royalties from iron ore sales to China, are another example of the feel-good factor flowing from WA’s isolationist approach to managing COVID-19; but the near-boom conditions in iron ore will not last much longer.

The problem with forecasting a downturn in iron ore royalties is that predictions along those lines have been made repeatedly, only to be withdrawn when Chinese demand kicks higher or exports from Brazil continue to fall short.

Both of those iron ore price drivers have a built-in expiry date, because that’s the nature of all commodity markets: high prices encourage production, which ultimately leads to overproduction, followed by a period of falling prices.

It’s the nature of all commodity markets that most people with an understanding of the WA economy can see as the biggest problem with a long-term hard border.

Quite simply, if you want to trade with the rest of the world, you can’t do it for long behind a locked door.

Two commodity-price trend lines help explain why WA is enjoying what might be called a fool’s paradise.

The first price line is iron ore. Professional investors see a peak today but believe the commodity is on the cusp of a long-term fall, during which the price will drop from its recent $US123 a tonne to less than $US100/t by March 2021, and then down to $85/t by the end of next year.

The second price line is for copper. Although not a major component of WA’s resources inventory, it is in other states, including Queensland and South Australia. Copper’s outlook is the reverse of iron ore, up from $US2.10 a pound in March to now be testing the $US3/lb mark, and potentially on its way to $US4/lb over the next two years.

So with investment in iron ore having peaked, and WA’s closed borders offering a ‘stop’ sign to the world, capital flows to copper-producing regions, Queensland and SA among them, appear set to grow.

And while WA’s iron ore miners will remain impressively profitable at $US85/t, the downward price trend will send a message to investors that the best of the boom is over and iron ore is settling in to a long-term period of flat prices, which means new investment and job opportunities will dry up.

Cutting yourself off from the rest of the world will also have a corrosive effect in other areas of business, especially when it comes to capital spending on new projects, whether in the resources sector or other parts of the economy.

Tourism, which has been named as a net negative because outbound travellers outnumber inbound, is a tricky issue for a state government keen to promote the sector as a job creator. The state’s small population means there isn’t a big pool to draw on; and as some parts of regional and remote WA have discovered, Perth visitors can be miserly spenders.

Then there’s the problem for WA with attracting investment capital. The state has never had enough locally-generated wealth to fund big investments, always relying on a flow of outside funds, which is why there has traditionally been a warm welcome for the investors wanting to buy a slice of WA’s strong economy.

The hard border might please voters, but it will increasingly become a turn-off for investors outside WA, which means the state will potentially face a shortfall in fresh investment as its reputation for isolation spreads.

Flying solo, which is essentially what the WA government is doing with its hard borders, will also alienate the state from the rest of the country, which means at some future date pleas over issues such as a bigger share of GST revenue will fall on deaf ears in Canberra.

Secessionists may be delighted with the way WA has cut itself off from the rest of the country, but it is not a viable long-term policy, and the longer it stays in place the greater the damage to the state.