28/09/2011 - 11:25

Mixed messages an unwanted distraction

28/09/2011 - 11:25

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Does Colin Barnett really think iron ore is like gold?

WHAT exactly did Colin Barnett mean when he said: “The longer the iron ore in the Mid West stays in the ground, the more it looks like gold”?

And, if it means what I think it does, should the premier have said those words to our correspondent Peter Kennedy last week after returning from a flying visit to China? 

Does he really think that iron ore will become more valuable over time? If so, it would be a view that challenges much about the way resources have been developed in this state. 

The belief that resources will become more valuable as they become scarcer is one commonly held by opponents of development. Conservationists, for instance, are always saying this; that we are selling our resources too cheaply and by slowing development you’ll get a result that is more economically sustainable, as well as environmentally so.

In my view conservationists are just saying that to suit themselves; they don’t want mining at all. They want industry inhibited and world growth slowed, and the best possible way of doing that is to stop the supply of raw materials.

The higher value/more scarce argument makes perfect sense in an economist’s ‘perfect world’ where everything else remained equal, but modelling and reality are very different and we all know how people use theories and modelling these days to influence policy.

That is why I think it is dangerous for Mr Barnett to even suggest such a thing.

In fact, it is the absolute opposite of his recent comments about Western Australia being in a race to develop its resources before Africa floods the world with cheap minerals.

“Africa is rich in natural resources,” Mr Barnett reportedly said. “Some of their iron ore deposits are richer than ours, but they are often inaccessible. 

“Africa is difficult but I would expect that in the next decade Africa will get a lot easier.”

This is the argument that I have been hearing a lot more of; that if we don’t get our mines up and running then new sources coming on stream in the next few years will make it too expensive in WA. That time is coming sooner than you think, because commodities have historically fallen in value as the manufacturers of the world have placed more intellectual property in the price of their output. 

The recent commodities boom has been seen as a super cycle, with minerals prices rising to a new, higher plateau; but the risk is that the abundance of iron ore and other products from WA mean prices ultimately return to previous historic levels.

And don’t discount the ability of science to get around scarcity.

Our farmers also thought that scarcity would increase value. Instead of selling their wool they hoarded it in vast stockpiles trying to control supply and push up prices. For a period that worked, but clothing manufacturers turned to substitutes – cotton and synthetics – and made them [the growers] pay. They didn’t just lose the value of their hoarded wool, they destroyed their industry and their future.

There is another, rather quirky angle to Mr Barnett’s comment about iron being like gold. The gold industry was once the big player in resources in WA. Even though it’s now having its day in the sun while the world economy perches on the edge of another recession, gold has become the poor cousin of iron ore in this town. When we drew up our list of multi-millionaire directors for last week’s paper, I don’t recall too many in there from the gold industry.

If I were in iron ore, I’d shudder if anyone wanted my sector to resemble the gold business.

Of course, Mr Barnett probably means that despite making Oakajee a priority project for his first term of government – and pushing the current proponents to give it the green light by a deadline set by the government – he realises that this is going to take longer than he hoped.

In that regard, he is probably optimistic Oakajee will get the go-ahead before he goes to the polls in early 2013. There is nothing like a big infrastructure project under way to make a premier look in charge of a growth state. Such news is gold in an election year.

Men with hats

THE Australian Workers Union and the Construction Mining Forestry & Energy Union have a big representation on the board of the Cbus superannuation fund established for the benefit of those working in the construction field.

According to its most recently published annual report, the fund has more than 660,000 members and funds of $17 billion.

It was interesting to see that its single biggest investment was in BHP Billiton, representing 3.5 per cent of its assets at June 30 this year. That’s about $600 million.

A further $187 million was invested in Rio Tinto. Amazing to think how much of their members’ wealth was tied up in two companies that have been bashed and belted for earning too many profits and paying them to foreign owners. 

I wonder if the members of the AWU and CFMEU realise they are likely beneficiaries every time a load of iron ore leaves our shores.  

And don’t get me talking about banks – the big four are each individually among Cbus’s top 10 holdings, collectively representing 6.6 per cent of the holding worth $1.12 billion. I thought the union movement had established Members Equity, including ME Bank, because it didn’t like the retail banks. 

I also wonder about the conflict of interest that union delegates on a superannuation board must feel when deciding on the best interests of employees, the workers who pay into the fund and pay dues to the union, and the employer companies in which the super money is invested.

What if they know about a strategy of industrial action that could hurt their investments? Should they be advising the fund to exit those holdings? That would be insider trading, surely?

How would they feel about industrial action if it hurt the profits of the companies invested in, even if it raised wages for members? What if by increasing wages they encouraged the companies to invest elsewhere, therefore reducing the opportunities for Australian workers? Should they even be investing in companies that make profits outside Australia? Why, for instance, have they made a big investment in a Polish heating network Dalkia Polska?

But it is not even as simple as that. There is also the role of the super fund itself.

As board members, their first loyalty is to the fund, the entity they govern. When the government first announced a mining tax it was to fund a rise in the superannuation levy from 9 per cent to 12 per cent.

Any fund administrator would have been excited by this – a 33 per cent increase in revenue mandated by the government for which there was no additional work to achieve. If only every business could have this – for some reason the superannuation industry, heavily represented by union-dominated funds, was one of the few beneficiaries of the sovereign risk that has hurt Australia’s reputation and many businesses operating here.

We never heard the super funds scream about the potential hit to their members’ wealth if the mining profits earned by their investments were transferred to government coffers? 

It must be very confusing to work out which hat to wear.

• mark.pownall@wabn.com.au

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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