ANALYSIS: Despite the best of intentions, WA’s economic performance has stuttered and stagnated as the end of the financial year approaches.
The big discounts on offer at this year’s EOFY sales have added a sense of urgency to what is traditionally a peak sales period; and for good reason, as it has been a lousy end to a year that started with promise and fizzled out badly.
One sector of the Western Australian economy that can claim to be ending the financial year on a high is gold mining, but you don’t need an economics degree to know that gold blossoms in troubled times. And with a local price hovering close to a record $A1,700 an ounce, gold is signaling problems ahead.
Other minerals, which are the lifeblood of the state’s commodity heavy economy, have not performed anywhere near the level of gold. Agriculture, WA’s other economic driver, has also had mixed fortunes – prices are up but everything else remains hostage to the weather.
Oil and gas, particularly liquefied natural gas, are reaching peak output with the start of the Gorgon project and the imminent start at Wheatstone; and while that’s good news, the focus next financial year will be on whether any new projects can earn a green light in an oversupplied energy market.
Woodside Petroleum is keen to develop its Browse and Scarborough gas fields, but whether it can do that will depend on the price of oil, which determines the gas price, and the willingness of its partners to commit the billions of dollars needed for new LNG supplies at a time of an oversupplied LNG market.
Iron ore, WA’s biggest business, had a good run for a few months last year before the reality of rising supply and sluggish demand delivered the inevitable blow to the price. A price rush over $US90 a tonne in February has been replaced by a sharp contraction to the $US50/t range, with the possibility of even lower prices later this calendar year.
A good measure of the iron ore industry, and a possible reflection of the wider WA economy, can be found in the share price of local leader Fortescue Metals Group, which rushed up in the first eight months of the financial year to a nine-year high of $7.27 in mid-February before crashing back to around $4.66.
The new crop of so-called battery metals – lithium, cobalt, graphite and nickel – blossomed like Fortescue and show promise of becoming a significant long-term contributor to mineral production. However, the collapse in the nickel price over the past six months is a sobering warning that nickel is oversupplied and the price will weigh heavily on existing producers, and inhibit new developments. Lithium, too, is facing price pressure from oversupply.
Any look back at a financial year should start with the sector that employs more people than any other – retailing.
For decades, WA retailers traded as if they were a protected species, with local stars such Boans, Bairds and Aherns able to ignore what was happening east of the rabbit-proof fence thanks to the state’s isolation from most east coast rivals.
Times changed when Sydney-based David Jones came to town, along with Melbourne’s Myer Emporium – arrivals that spelled the end of the local department stores.
History is repeating, but this time it’s the national retailers that are being savaged by international competitors, many doing business in WA without a shop front thanks to the advent of the internet, which is getting faster by the day (in theory) as the National Broadband Network rolls out and home shopping displaces a traditional visit to the high street or mall.
A sharp early-June fall in the share price of Wesfarmers – WA’s most successful industrial company and a business with a number of retail operations – was a fresh shot across the bows of all retailers. Wesfarmers is the latest victim of a trend becoming known as the ‘Amazon effect’, named after the US online retail giant that has Australia in its crosshairs.
Pressure on WA consumers can be measured in a number of ways other than day-to-day shopping.
A slowdown in car sales is being reflected in a profit downgrade by the state’s biggest dealer, Automotive Holdings Group, and a sharp decline in the company’s share price since hitting a 12-month high of $5 last August of AHG has declined to recent sales at around $2.94.
Property values, which had been expected to improve this year after 4.7 per cent fall, have not picked up and now seem to be under more pressure as the rest of the country deals with high debt levels and the fear of rising interest rates, or higher bank charges to offset a new tax on bank balance sheets.
For the newly elected WA government, the state’s economy and the parlous condition of Treasury must feel like a baptism of fire for Premier Mark McGowan and Treasurer Ben Wyatt.
Having rejected budget measures proposed by the former premier, Colin Barnett, such as the sale of Western Power, the new government is being forced to adopt alternative measures, most of which will be unpopular, such as a hefty increase in power charges.
Political change has not been isolated to WA. International events, such as the election of Donald Trump as US president, and his ‘America First’ focus will not be good for global trade, and that means more pressure on the WA economy, which is the most internationally exposed of the Australian states.
Consider the following important events of the past 12 months, and likely trends ahead.
• Overall economic growth, a missing ingredient in WA since the end of the mine-building boom and a factor unlikely to return quickly. Chinese demand for the state’s exports is the critical issue for mining and farming, and if China hits a speed bump, which some economists are forecasting, then WA will feel the aftershock.
• Job losses rather than job growth has been a major negative over the past 12 months, with unemployment close to 6 per cent well above the long-term trend of a 4.7 per cent rate of unemployment. The trend is for unemployment to remain high.
• Property, residential and commercial/retail, will remain under pressure. The residential sector, which affects almost everyone who owns a home (or wants to own one), has been trending down in WA for the best part of five years, a direct result of the end of the mine-building boom. What happens next might not be an overdue recovery because property values in other states have started to fall and WA could be caught in an Australia-wide decline.
• Debt, always an economic Achilles heel, is of rising concern thanks to the decade-long period of ultra-low interest rates, which have enticed households (and business) to load-up on cheap debt without thinking about the long-term consequences. A difference this time is that while interest rates are unlikely to rise rapidly (if at all), borrowers’ debt-servicing obligations are already bumping against the ceiling.
• Agriculture, the sleeping giant in the WA economy, showed signs of waking during the past 12 months thanks to a period of strong prices for wheat and wool. The problem, as ever with agriculture, is seasonal risk. In WA, this boils down to winter rains, which will determine the success, or not, of most farmers.
• Iron ore, as mentioned earlier, had a good start to the financial year but is ending it on the skids. The price decline is not stopping the major producers, BHP and Rio Tinto, from pushing ahead with expansion projects. And while they are welcome, they are also unlikely to get under way for several years, with the added problem of ensuring that smaller rivals will be unable to carve out a market niche.
• Signs of a fresh crisis in the nickel industry, with many small miners already forced out of business. However, with the price hovering near a record low, pressure is being felt on even the biggest producers of the steel-hardening metal.
• Gold at $A1,700/oz is encouraging a rapid shift by explorers and small miners away from more complex metals that require some form of processing and marketing, such as nickel and copper, and back to gold, which is effectively a form of money.
• Lithium is an emerging and potentially major mining industry for WA, with the Greenbushes mine already the world’s largest supplier and other mines starting to produce, or under construction.
• Uranium has spent so long on the sidelines that only the truest of true believers have any hope left that the WA prospects under consideration will be developed, thanks to the problems of a low uranium price and ongoing uncertainty about government approval.
For long-term residents of WA, the next 12 to 24 months are likely to feel like a return to pre-boom times, a period when WA was dubbed the ‘Cinderella State’ because it was never invited to the national ball.
The harsh treatment of WA in carving up GST is an excellent example of the other states, and the federal government, being quite happy to see a return of the Cinderella tag.
