16/10/2014 - 13:13

Players rehearse lines as drama unfolds

16/10/2014 - 13:13

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Verbal and financial volatility is the best way to describe what’s happening in Western Australia today.

Players rehearse lines as drama unfolds

Verbal and financial volatility is the best way to describe what’s happening in Western Australia today.

If it hasn’t been senior mining company executives trading caustic comments with Premier Colin Barnett, it’s been the remarkable collapse in the share prices of most resources-exposed companies.

The two events (verbal and financial volatility) are quite obviously connected, because the worldwide fall in commodity prices is piling pressure on government and corporate budgets.

If what’s happening hadn’t been so predictable there might be reason to feel concerned, but the fact is we’re simply seeing the final act of an opera called ‘Mining Boom (the death scene)’.

Everyone is feeling the strain as profits evaporate, jobs are lost, companies collapse, and the new-project pipeline shrinks to a trickle.

Before explaining what triggered the attack by Mr Barnett on the state’s two biggest miners – BHP Billiton and Rio Tinto – it’s important to remember that WA’s economic growth mimics the trajectory of a yo-yo, up sharply, down sharply, with a few tricks tossed in.

That means the gloom shrouding Perth today will fade as quickly as it has blown across the city; and while that will not ease the immediate pain, there are enough old-timers in business to tell the youngsters that we’ve seen it all before.

The post-Poseidon crash of 1974 was a grim affair for WA, as was the shock of the collapse following the 1987 stock market rout and exposure of deep-seated dirty deals. The Asian financial crisis of the late 1990s was another jolt to the economy, as were the effects of the 2008 GFC.

WA emerged from all those events in reasonable, if not better, shape thanks to our natural advantages of a small population and a world-class inventory of resources (mineral and agricultural) demanded by Asia.

So much for the good news that lies ahead; now for an explanation of why some of WA’s business and political leaders turned on each other last week with the ferocity normally reserved for a country week football final – especially when Collie meets Bunbury.

The sequence of events goes like this:

1) Commodity prices fall sharply with gold, oil and iron ore inflicting particularly painful punishment on WA.

2) Mining companies and the state government scramble to patch holes in their budgets and batten down the hatches for a torrid 12 to 24 months.

3) Ivan Glasenberg, the very acquisitive chief executive of the Swiss-based mining and commodity trading company Glencore, tosses a hand grenade into the boardroom of Rio Tinto in the form of a suggested ‘merger’, which is code for takeover.

4) Mr Glasenberg knows his proposal, lodged in mid-July, will be rejected and he also knows that under London rules he can’t make a fresh merger suggestion until six months after the initial approach.

5) Rio Tinto knows the clock is ticking because by mid-February next year the merger proposal window will have re-opened and it will be lodging its 2014 full-year financial result, which is likely to show a fall in pre-tax profits thanks to low commodity prices.

6) It was Mr Glasenberg’s deliciously timed merger proposal which started the clock ticking on a time-bomb at Rio Tinto, forcing it into an all-out defensive mode, which includes maximising profits to ward off what is the certainty of a fresh attack next year.

7) Takeover pressure caused some Rio Tinto executives to get overexcited, with one comment shining out over all others – a threat to keep expanding iron ore operations to keep 32 potential rival iron ore miners out of the industry.

8) That comment about using market power to harm rivals sent Mr Barnett into orbit, and led directly to his comments about BHP Billiton and Rio Tinto acting in concert (a form of collusion), which is not allowed under trade laws.

Since that bit of biffo between the premier and his one-time friends in the big mining companies, apologies have been made and a silence has descended.

But it is the silence of a delayed fight, not the silence of an empty arena.

Meanwhile, BHP Billiton is bravely planning to divest some assets at the worst possible time in the commodity cycle – a deal looking less likely by the day.

Rio Tinto, a serial disappointment to its shareholders, is fighting to repair its commodity slump damaged accounts.

Mr Barnett is trying to damage his royalty-depleted treasury.

In London, however, it’s a different story, because in the Mayfair head office of Glencore Mr Glasenberg is having a quiet chuckle at what he’s started, and gleefully waiting for the six-month deadline to pass so he can lob his next grenade at Rio Tinto.

 

No wonder there are some angry and anxious people in Perth.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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