17/01/2017 - 12:02

Setting foundations for growth

17/01/2017 - 12:02


Save articles for future reference.

OPINION: The effects of recent positive export numbers on WA’s trade-exposed economy could be a positive for the year ahead.

Setting foundations for growth
Iron ore miners have cut costs sharply, while the exchange rate is helping profit margins. Photo: Rio Tinto

OPINION: The effects of recent positive export numbers on WA’s trade-exposed economy could be a positive for the year ahead.

What's in a word?

When the word being examined is ‘boom’, there can be an equal number of positive and negative reactions; and while many people in Western Australia have bad memories of the last time a boom surfaced, the future does look better than the past.

HSBC, one of the world’s biggest banks, is responsible for reigniting the boom debate with a report mentioned in the Business News online edition of January 9 (‘Trade game is changing’).

The focus of the bank’s research, in a document headed ‘Australian exports booming’, was a surprise surge in exports, led by iron ore and coal, which jumped by 8 per cent in November to deliver a 12-month export increase of 15.7 per cent.

Left unsaid by HSBC was the more complex question of whether the trade boost is being felt across the economy.

The quick answer to that question is not yet, but the longer answer is that, on current trends, WA should be a more buoyant place by mid-year, and certainly by the end of 2017.

The reason for the optimism is that WA, more than any other Australian state, is highly trade exposed, accounting for more than 40 per cent of Australia’s exports by value.

That high proportion of national exports means that the lion’s share of the increase over the past 12 months can be attributed to WA, with major contributions from iron ore, gas, alumina, gold, wheat, wool and beef.

A second factor adding to this outbreak of optimism is that the profit margins of producers are approaching boom-time levels thanks to the combination of a recovery in prices and severely trimmed costs enforced by the economic slowdown of the past few years.

Sticking with iron ore as a case study, it’s worth looking back to 2012 when the iron ore price was around $US110 a tonne and the cost of production varied between $US35/t and $US48/t, with Fortescue Metals Group the high cost producer among the big miners.

A simple way of looking at those price and cost numbers is that Fortescue was generating a gross profit margin of $US62/t – a number trimmed on conversion to Australian dollars of around $A60/t because the exchange rate in 2012 was $US1.02, and higher.

Today, and these are quite interesting numbers, the iron ore price is close to $US80/t. Fortescue’s costs have been cut to around $US13/t to leave a gross margin of $US67/t – with more on conversion because with the exchange rate at US73 cents the Australian dollar profit margin for Fortescue is $A91.78/t.

Higher prices, lower costs and fatter profit margins are starting to have an effect on WA in a number of ways, including the first signs of an improvement in residential property prices and hints that job vacancies are rising.

More of the same is required over the next six-to-12 months to convince everyone that WA has hit the bottom and is now climbing, quite quickly, out of a deep economic hole.

The repair process will not be smooth (it never is) and there will be winners and losers as the state economy regains strength after the battering of the bust that follows every boom.

A confusing influence on the recovery debate over the next two months will be the state election campaign, with the government doing its best to argue that the future looks bright while the Labor opposition will be doing its best to remind everyone of the problems caused by the crash, including high levels of state debt.

But for anyone with a glass-half-full view of the world as opposed to those with a glass-half-empty view, the green shoots that were spotted last year can be seen to be growing into something more substantial and sustainable.

Project go-ahead development decisions are being made, including Gruyere (gold), Pilgangoora (lithium), Silvergrass (iron ore), and Mt Morgans (gold). Jobs are on offer at Roy Hill (iron ore) and exploration, after several lean years, is accelerating.

Deal flow, including mergers and acquisitions is picking up and money that has been flowing out of WA is starting to flow back in, with the recent purchase of the historic Golden Grove copper and zinc mine for $US210 million a sign of increasing confidence that now is a good time to buy (or build) something.

Perth property prices, the worst performing in Australia for the past two years, have just recorded a 2 per cent rise in the December quarter, a modest move up but better than the consecutive quarters of falling prices.

Even property in the Pilbara, arguably the front line of WA’s export-led economy, appear to have stopped falling, with bargain hunters busy snapping up properties being offloaded by distressed sellers and the banks, which inherited homes after workers lost their jobs.

Nothing that has happened so far can be called a boom, but when a normally conservative bank such as HSBC uses the word to describe the change in Australia’s trading position then it might not be long before there is a flow-on effect in WA.


Subscription Options