WA's iron ore ports have long valued the idea of being closer to their customers.
My efforts the past week were largely directed at updating myself on WA’s major ports as part of our infrastructure feature for this week’s paper.
But, I also had an interesting interview with Andrew Bellamy, the new chief executive of Austal.
The nautical theme in both those stories is completely coincidental – Austal’s ships rarely enter a WA port let alone operate out of any of them.
But both stories highlighted the need to be closer to the customer.
In my interview with Mr Bellamy he explained how he came to leave Honeywell, a US multi-national which he was working for at the time in England. The company did a study and determined it would be better for business if operations were based closer to its market. He called it customer intimacy.
The outcome was for Mr Bellamy’s business to relocate to the Middle East. Having lived there before he chose not to go with that group and, ultimately, left the company due to what he described as a natural break.
Getting close to your customer is nothing new.
It’s an expression that marketing professionals are familiar with and it’s the reality that has left Western Australia’s attempts at value adding dead in the water.
Even when our costs were relatively competitive, we were too far away from customers who wanted steel or other processed goods. That continues to be the case today, no matter how you try to cut the value-adding argument.
But how does getting closer to your customer count when it comes to WA’s ports?
Well, the answer lies in the Pilbara where the world’s second and third-largest bulk commodity ports – Port Hedland and Dampier – operate, exporting iron ore to China, Japan and Korea.
You would think that something as static as a port would have little need to get closer to its customers, right?
Furthermore, you would think that the dominance of the customer base – BHP Billiton in Port Hedland’s case and Rio Tinto for Dampier – would further reduce the need for intimacy. Wouldn’t that be par for the course? Especially, as Rio and BHP basically own the towns that the ports operate from.
Far from it, it appears.
Believe it or not, the Dampier Port Authority has long had an office in Perth and, in 2009, it expanded its space to accommodate staff from the Port Hedland Port Authority to create a Regional Port Centre.
While the initiative may have been a precursor to the now-aborted Pilbara iron ore joint venture between the two mining majors, I found it quite revealing that two infrastructure providers so synonymous with their locations needed to have a presence so far away from their own operations.
The DPA explained its presence in West Perth as being ideal as it offered close proximity to the key government people such as the WA Transport Minister and other key stakeholders, which presumably includes its customers.
Port Hedland said the majority of its planning, development and commercial staff were now based in Perth “enabling us to better service both our current customers as well as future proponent needs”.
While there’s no doubt that the civic leadership of the Town of Port Hedland and the Shire of Roebourne would be disappointed with this development, there is no doubt that the power of having resident decision makers does increase a city’s influence in the power game and, therefore, its wealth.
I was told this week that 85 Chinese delegations visited Perth in the past year. This is an important step. No longer are all key decisions about the development of our state taking place in London or New York.
Those financial capitals have their say, but when you look at the executives on the ground in Perth both from the big multi-nationals and the smaller local companies you will find they are much closer to their customers in Asia than the bankers or shareholders in Europe or North America.
Outlook gets better
No matter how much the nuclear industry attempts to brush away the longer term ramifications of the disaster at the Fukushima Daiichi power plant, Western Australia’s natural gas business is busying itself for what will be an even more buoyant period than earlier bullish expectations led it to believe.
The reason is the so-called black swan events, which some others in the press have already reminded many readers about. I love the irony of the Perth-based companies benefiting from these unexpected events, named because European science had discounted the possibility of ever finding a black swan – before they were discovered on the Swan River.
Fukushima is just one of two very recent events which have made WA’s LNG players even more alert to the possibility of capitalising on their assets than ever before.
The other is, of course, the political disruption in the Middle East. Not only do petroleum dependent nations look with horror at what is happening in countries that supply much of the world’s oil but even those close by are tarnished with the same brush.
Take Qatar, for instance. It is an LNG giant already and has benefited from demand for this cleaner fuel. But even without known internal dissent, the destabilisation of the region is worrying customers who don’t want all their energy needs in the same basket.
There is potentially another black swan event for WA’s LNG players – the BP disaster in the Gulf of Mexico. I don’t know much about the business end of the oil and gas industry but presumably the extraction of gas has a lot less environmental risk than taking out the fluid?
All of these examples have the local LNG players scrambling for their calculators to make every possible project stack up and ensure every extra inch of seabed is explored as thoroughly as possible.
And before anyone dismisses the sudden nature of the shift in Japanese energy, there seems to be some very big reasons to favour a dramatic shift in that nation’s power generation, at least for the medium term.
I gather that, due to Japan’s structured energy market, its natural gas-fired generation runs at about half of its capacity. If true, that is a big amount of energy production that is available at short-notice and relatively cheaply to fill the gap left not just immediately by the earthquake but in the longer term if nuclear expansion is cancelled as expected.
Of course, Japan will need the gas and that is less easily supplied so quickly because the LNG business is not structured to have huge amounts of spare capacity.
The natural place for such supplies would have been the Middle East but the political unrest makes that less attractive.
The test for WA’s producers is how quickly they can fill the breach both by getting projects up and then implementing them.