25/03/2010 - 00:00

Tied to China, Australia to lose in trade war

25/03/2010 - 00:00

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If the US Treasury formally declares China to be a currency manipulator on April 15 ... watch out

BEING a good winner can be harder than being a good loser, as the US discovered after winning the Cold War, the Australian gold industry has discovered as it prepares for a tax hike, and as the entire country might discover over the next few weeks – if only as collateral damage in a looming global trade war.

The US example is perhaps the best understood, and really nothing more than history repeating the way it treats all empires, from Roman to British. No sooner was victory declared at the fall of the Berlin Wall in 1989 than the US decline began, and continues.

The gold industry had its big win when the price of the metal finally scaled the $US1,000 an ounce barrier last year, only to discover that every government in a gold-producing country asked its tax department to peel off a slice of the win. In Western Australia’s case, that will come later this year in the form of a sharp increase in state royalties.

But the most worrisome win in decades is China’s great currency-driven trade victory, which has catapulted it up the economic growth path, and beggared the rest of the world.

If that sounds a little complicated, just picture China’s spectacular growth of the past 20 years largely driven by an artificially low exchange rate that has enabled it to flood the world with cheap exports, effectively killing the competition.

Australia, particularly WA, has joined the celebrations because we sell China the raw materials by which it has been able to undercut manufacturers in other countries of everything from computers to cars, with the biggest victims being Europe and the US.

The problem for China (and Australia as its raw materials supplier of choice) is that victory comes at a price, and part of the price is angry politicians in the US and Europe who are watching their chances of re-election fall as the unemployment queues lengthen.

Retribution time nears, with April 15 the date when the US Treasury might formally declare China to be a currency manipulator, triggering a range of measures including higher tariffs on Chinese imports, a move which would encourage Europe to follow and, hey presto, we have a trade war.

Who wins trade wars? Nobody. Everybody loses. However, in this case one of the biggest losers could be Australia as it (a) watches raw material exports to China slow, and (b) is forced to pick a partner – are we going to side with the US or China, and if you think we can be friends with both consider what happens when friends divorce, you rarely stay close to both sides for long.

Right now, all that is happening is that the US and China are banging their trade-war drums for domestic consumption. But with US determined to rein in its 10 per cent unemployment rate, and blaming China for damaging its factories, there is a 50-50 chance that something nasty will happen.

Among the possible unpleasant developments are higher tariffs on Chinese goods, and a sharp fall in the value of US dollar, which will trigger a worldwide currency value adjustment as the US claws back lost export markets, and China watches $US1 trillion of its savings held in Treasury Bonds diminish in value.

If there is to be a winner as the world marches off in the direction of a trade war it is gold, which will be perfectly poised to resume its role as the ultimate reserve currency.

Lobby lethargy

ODDLY, a higher gold price after the April 15 determination by the US as to whether China is a currency manipulator, might not be good news for WA gold miners, who are already starting to feel somewhat lonely.

Just how lonely was illustrated last week when they were forced to form a new lobby group called the Gold Royalties Response Group, which had little more to say than an increase in the royalty on gold production is bad for the industry.

No surprise in that line of arguing. An increased royalty (which is simply a tax with a fancy name) is not designed to help the industry. It’s designed to help government, which has a hole in its budget and reckons gold miners celebrating the high price for their commodity are an easy target, which they are.

What interested Bystander wasn’t the utter predictability of the government tax hike, and the bleating from industry, it was the fact that a new lobby group was formed.

Where, it can be reasonably asked, was the Chamber of Minerals and Energy? Surely it should have played the lead role in defending goldminers from higher taxes.

Not in this case it seems, because while the chamber muttered about higher royalties being bad for mining, the low-key response revealed how it is little more than a captive of the big miners, such as BHP Billiton and Rio Tinto, who have no interest in gold in WA, but every interest in iron ore.

Not surprisingly, the iron ore boys are quite keen to see gold get whacked a bit harder.

Diamond days done

GOLD is not alone in facing the challenge of rising costs. There is another sector of WA’s mining industry with an awful outlook – diamond miners are being whacked by reduced demand and higher costs courtesy of the rising value of the Australian dollar.

Argyle, once the pride of Rio Tinto, is supposed to be expanding via a $1.8 billion underground development, though so little has been heard recently that Bystander reckons the deeper mine could be a victim of internal cost-cutting.

The last optimistic word on Argyle was on September 14 last year when the company said work on the expansion would resume this year.

Unfortunately, that was when the dollar was priced at US85 cents and talk of economic recovery was strong. Today, the dollar is at US92 cents.

The world’s major diamond market, the US, is not recovering, and Rio Tinto is on the verge of walking away from diamonds altogether because of better profit opportunities in iron ore and other commodities.

“War is the unfolding of miscalculations.”

Barbara Tuchman

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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