Unusual times create policy challenges

The past week has thrown up a raft of extraordinary policy challenges for the Carpenter and Rudd governments, which are presiding over unusual times.

Chinese group Chinalco’s $12 billion investment in Rio Tinto was a historic moment in so many ways.

It highlighted the emergence of China on the global stage, as it evolves from a minerals import and manufactured goods exporter to now being a capital exporter.

Many people in Western countries have trouble coming to terms with the China phenomenon.

They enjoy the keen Chinese demand for Australian resources, which creates many jobs in this country, and they also lap up the cheap consumer goods manufactured in China.

But when it comes time for the Chinese to use some of their newly acquired wealth to invest in Western companies like Rio Tinto, acceptance doesn’t come so easily.

It’s fair to point out that China is still a one-party dictatorship lacking in the governance and transparency we like to see in Western countries. But to conclude that Chinese investments will be designed to serve some mysterious strategic interest that is alien to Australia’s national interest in a giant leap.

Chinalco president Xiao Yaqing sounded very much like a profit-oriented Western investor when he fronted a press conference in Sydney this week.

Australian policy makers need to carefully scrutinise any plans  Chinalco has for this country, just like they need to carefully scrutinise all major projects and investments, but let’s not automatically create a new set of standards for the country that has grown to be this state’s major trading partner.

Developing state’s gas reserves

IN the absence of a formal takeover offer for Rio Tinto, a more profound policy challenge for the Carpenter and Rudd governments is their proposed ‘use it or lose it’ approach to gas reserves.

The policy sounds very appealing. If companies like Chevron, Apache and Woodside sit on valuable gas reserves year after year and block their development, then governments should be entitled to review ownership of those reserves.

The crucial test is whether those companies are making reasonable efforts to develop their reserves.

The reality is that all of the companies listed above are already making a huge investment in Australia, either evaluating or actually developing big projects.

We are still waiting for alternative developers to step forward with concrete and realistic plans to develop reserves that are sitting idle. 

Boom can be tough for business

THE current business environment has proved surprisingly challenging for a number of large private sector companies that should be thriving.

Boom Logistics describes itself as the largest provider of crane services in the strong growth states of Western Australia and Queensland.

Demand for its services is strong – a cursory glance around the CBD, which is dotted with cranes, supports this observation.

Despite this, it issued a profit warning this week and said it had an urgent focus on reducing fixed costs across the business.

That sounds like a strategy for a recession, but is Boom’s response to the squeeze on its profit margins, arising from higher costs and supply constraints in the mining industry and difficulty in sourcing large capacity equipment.

It added that increased turnover among staff and management also contributed to the cost and performance outcome.

It’s a common lament.

Bradken, which supplies a wide range of capital equipment to the resources sector, also provided some insights into business trends.

There is a general perception that mineral production in Australia is booming, but that was not Bradken’s experience.

It said that, while iron ore production rose, copper and gold output fell and coal and other commodities were “flat at best” due to infrastructure bottlenecks and delays in expansion projects.

An encouraging sign was the news that Bradken has approved the next stage of the upgrade of its Welshpool foundry, which is one of its key manufacturing facilities for ground engaging tools.

Like many other manufacturers, Bradken is also investing in new facilities in China for its booming rail-car business.

It is inevitable that manufacturers will look at shifting some of their production to low-cost jurisdictions. The challenge for Australia is to ensure that high-value and more sophisticated manufacturing has a long-term future, to ensure the local economy retains some diversity.

A third company that provided some revealing insights was Perth-based heavy equipment supplier Emeco Holdings, which has scaled down its profit outlook.

Emeco has a strong business in Australia supplying equipment to civil contracting and mining operations,

Managing director Laurie Freedman said earnings from the Australian business would be higher but the group would suffer because of the poor performance of its international operations, especially in the US and Indonesia.