Major resources players are increasingly investing profits made in WA elsewhere.
The iron ore boom that has underpinned Western Australia’s economy for the past two years hasn’t ended, but it’s certainly starting to wind down.
Without wanting to sound dramatic, that new reality will challenge everyone exposed to the industry, especially the state government.
From an all-time high of $US233 a tonne as recently as May, the price of high-grade iron ore has slipped below $US190/t and is widely expected to continue falling as supply from Brazil rises and demand from China plateaus.
Gold also appears to be at a peak, and while it might stay around $US1,800 an ounce or even move up to $US2,000/oz, that’s about as good as it gets.
What’s happening is not a surprise because all commodities are cyclical, but what could change the government’s relationship with miners is the discovery that profits earned here might no longer be reinvested here.
Other countries are increasingly becoming the destination of profits made in WA mining with Canada, the US, Mongolia, and Serbia among the beneficiaries of the state’s resources sector.
International investors are already major winners from WA’s commodity exports, as seen in Rio Tinto’s huge half-year dividend of $US5.61 a share (most of which is going to people living in Britain, the US and Europe).
Another wave of cash heading offshore will take place later this month when BHP reveals its annual profit and dividend, with the lion’s share of its payout heading overseas.
Even Fortescue Metals Group, despite the biggest payment going to its Perth-based chairman Andrew Forrest, will be shipping cash to shareholders around the world.
The big miners have ploughed tens of billions of dollars into developing the mines, railways, and ports that are the backbone of the WA economy.
But much of the investment phase is largely complete and miners are now switching to a cash-harvesting phase with only modest capital works continuing (the exception being Fortescue’s Iron Bridge magnetite processing project).
Smaller iron ore miners and late arrivals at the party will struggle to justify investments if the iron ore price continues to fall, which seems likely, and costs rise (which is certain).
If in doubt that this is how events will play out you only need to look back at earlier phases of the iron ore industry, during which most small players were forced out by the pincer squeeze of a falling price, rising costs, and a hefty discount on their second-grade ore.
It’s also worth considering just how abnormal conditions have been in iron ore for the past two years, because an iron ore price above $US100/t is unusual and above $US200/t is so rare it has never been seen before.
A more normal price setting is the $US75/t average seen over the five years from 2014 to 2019, or back to $US40/t, which prevailed before the 2008 GFC.
As iron ore slides back to a more sustainable price, the big miners will be looking for more profitable investment opportunities.
The good news for WA is that it has a new industry already taking shape in the form of battery metals such as lithium and nickel, and technology metals such as rare earths.
As promising as the battery metals sector looks it will be many years, if ever, that it is able to plug the hole being created by the decline in iron ore; and to even get close it needs to move up the value-added chain.
Unfortunately, WA will struggle to become a major player in turning ore into anything other than a first-stage value-added product, given our high power and labour costs and distance from places where batteries and electric cars are made.
To retain value in WA, the state government will be forced to consider incentives in some form or be prepared to watch the cash spewing out of the iron ore and gold industries find a home elsewhere.
BHP, for example, is keen on Canada, which is not surprising because it is a top-tier investment destination like Australia but is also the birthplace of the company’s top two executives: chairman Ken MacKenzie and chief executive Mike Henry.
The biggest new investment option on the desks of Messrs MacKenzie and Henry is the Jansen potash project in the Canadian province of Saskatchewan, while the latest nickel investment is a takeover bid for the Ontario-based Noront Resources.
Profits from WA iron ore provide most of the cash for those deals.
WA nickel will remain a focus of BHP’s involvement in WA but the money going in is most unlikely to match the money coming out as the resources cycle turns.
Rio Tinto is also looking beyond WA with projects under way in Mongolia (copper), Serbia (lithium), and Guinea (iron ore), all part paid for with cash generated in WA.
Fortescue, which can rightly claim to be more of a WA business than the other big iron ore miners, is another example of a company that has largely completed its investment here.
Its next growth phase will be elsewhere, given its global hunt for renewable energy opportunities ranging from hydrogen projects in Tasmania to hydroelectricity opportunities in Africa.
WA will retain its top-tier status as a resources sector destination, but it will have a problem with the high costs inherited during every boom, which is why today’s big investors are starting to take some of their winnings off the state table and investing it elsewhere.
Ian Goldin, the keynote speaker at this month’s Diggers and Dealers conference in Kalgoorlie was right to warn about the risks of sabre rattling and talking up tensions in the trade war with China.
But what the former vice-president of the World Bank and Oxford University academic cleverly dodged is that small matter of how one-sided the trade war is and how astonishingly abusive Chinese diplomats have been about Australia.
There is, of course, no point in debating who said what and when, but there is also no doubt that all the aggressive trade sanctions have been levied by China on Australian exporters because of Australian demands (along with other countries) for an open inquiry into the cause of a pandemic which has killed millions of people.
Dialing down the rhetoric, which was Mr Goldin’s suggestion, sounds like good advice to be dispensed to an Australian audience but it’s highly unlikely that he would say the same thing to a Chinese audience; and that’s the real problem.