18/06/2013 - 13:27

Reality check needed on Oakajee

18/06/2013 - 13:27

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If Colin Barnett were in the habit of taking advice, which he’s not, then he would stop pushing hard for development of the Oakajee port near Geraldton – because Oakajee is a dead duck.

Reality check needed on Oakajee

If Colin Barnett were in the habit of taking advice, which he’s not, then he would stop pushing hard for development of the Oakajee port near Geraldton – because Oakajee is a dead duck.

Like earlier attempts to develop ports in Western Australia, Oakajee suffers from a fatal flaw – there is not enough business to justify its development.

Perhaps there was enough business during the height of the iron ore boom, but not now; and almost certainly not for a long time as global demand for iron ore slows and low-cost producers in the Pilbara and Brazil snatch a bigger share of the market.

For Oakajee this is simply a case of history repeating, both in terms of the market turning sour and for the government picking a loser as the primary business sponsor.

Back in the 1990s, Oakajee was a development favoured by the local iron ore hopeful Kingstream Mining and its Taiwanese backers the An Feng steel group.

An interesting business, An Feng could never provide the depth of demand for iron ore needed to pay for Oakajee. It also needed markets in Japan and China, and both of those countries had no reason to deal with a business based in Taiwan – China because of history and Japan because it did not want to pick a fight with China.

The latest collapse of the Oakajee proposal is a variation of a theme. This time it is Japanese companies that have failed to find the markets for the iron ore, while China is annoyed with Japan over territorial disputes and would not buy iron ore shipped from a Japanese port.

While the question of ‘face’ in Asian cultures has played such a prominent role in the history of Oakajee, there are two other factors that weigh heavily on the proposed port.

The first, and most important, is the changing nature of the global steel industry, which was once growing at more than 5 per cent a year but which grew at just 1.2 per cent last year and is currently growing at around 2.9 per cent.

As iron ore has only one significant end use – steel – it is impossible to sustainably grow output at a faster rate than steel production, and steel growth is slowing as the Chinese economy switches from its helter-skelter construction phase into a consumption phase.

Low-cost Pilbara producers, with the aid of low-cost Brazilian producers, will dominate the future of iron ore, driving higher-cost producers out of the market (as they have done in the past).

If the reality of iron ore supply and demand are not enough to convince the premier that Oakajee is a mission impossible, he can go back a bit further in history to see how low cost always beats high cost.

In the 1960s, one of Mr Barnett’s predecessors, Charles Court, championed an iron ore ‘port’ near Augusta on WA’s south coast.

Back then, as now, it was Japanese companies that were keen to build a long jetty into the Southern Ocean from which they could ship out iron ore mined from the Scott River deposits.

The opening of the big Pilbara mines killed the Scott River port and mine in an example of cheap and uncomplicated beating expensive and difficult.

Politically, Mr Barnett probably feels the need to press ahead with Oakajee for a few months, if only to say he tried.

But the economic reality is that Oakajee was doomed from the day the Mid West iron ore industry started to wilt (as it has in the past) from the problems of relatively small deposits of high-grade direct-shipping material and a mistaken belief that processing low-grade material (magnetite) would provide the tonnes to support a purpose-built port.

Not only has the price of iron ore contracted as Chinese demand has slowed, but the Mid West magnetite hopefuls (bar one) have faded from view, as the Pilbara miners push ahead with their expansion programs – because they can as the low-cost producers.

As for China stepping in to save Oakajee, that is a remote possibility and hardly worth the political capital it could consume. China will demand a high price from WA after being snubbed the first time around as the preferred bidder, and more recently because of its appalling experience at the Sino Iron magnetite project in the Pilbara.

For WA it would be best if the government shifted its focus to more achievable goals, leaving port building to the businesses that will use the port.

And if business can’t pay for Oakajee, then WA taxpayers shouldn’t be asked to.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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