28/09/2011 - 11:24

West needs bout of ‘creative destruction’

28/09/2011 - 11:24

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A former Singaporean government minister has offered the West a harsh dose of economic medicine.

SOMEBODY had to say it, not that too many people in Europe, the US or Australia were listening, however, when a leading Singaporean politician suggested his recipe for economic revival in the Western world was ‘work longer hours for less pay’.

They were not the exact words of George Yeo; the direct quotation from Singapore’s former foreign minister was much tougher.

He told a conference in China last week that the Western world required a bout of “creative destruction”, adding that “American and European workers had to learn to compete, toe-to-toe, with educated Asians willing to put in longer hours for much lower pay.”

His king hit, however, was in the final suggestion, that “this might test the political system to breaking point”.

Mr Yeo’s message, delivered at a meeting of the World Economic Forum in Dalian, has resonated through Asia and the rest of the emerging world.

Shortly after hearing that their workforce was lazy and overpaid, European countries were told by China’s premier, Wen Jiabao, that bold steps were required to improve economic ties with Asia, while also suggesting that China would not be rushing to save Europe.

Next in the queue to give Europe a kick was Brazil, leader of the group of emerging economies known as the BRICs (Brazil, Russia, India and China). Its finance minister, Guido Mantega, said Europe had to save itself and not expect help from outside.

 “It has the tools to resolve the sovereign debt problem of Greece and other countries and the problem of bank weakness,” Mr Mantega said.

There are two themes running through the message being sent to Europe, both of which should be picked up in Australia.

Firstly, the countries lecturing Europe were once colonised by, and subservient to, nations from that continent. Speaking out now is perhaps the greatest ever example of a worm turning.

Secondly, Australia risks falling into Europe’s trap if it imagines it can ride the resources boom forever, pay itself high wages, work shorter hours, and layer-on ever-more-generous social welfare handouts.

A glimpse of what’s to come here can be found in the bleating of local metal fabricators and union leaders that jobs and contracts in the mining and oil sector are going to Asia when they ought to be available here.

There’s a reason they’re not here, and it lies in the warning that Mr Yeo gave to Europe in his provocative talk in Dalian.

What’s happening is far more than a migration of wealth from the Western world to the east; it is a total game-changing event that will include a transfer of political power, and perhaps military power.

Money is the current flashpoint of the shift from West to East and the best example of that is the humbling of the once great Swiss institution, Union Bank of Switzerland (UBS).

Two avoidable ‘accidents’ have turned UBS into a shadow of itself. The first came in 2008 when it was caught with a fistful of useless US junk debt and sub-prime mortgages.

The second came last week when one young man with access to the UBS balance sheet blew $US2.3 billion out the window because he was not properly supervised.

Amusing as it was to see a Swiss bank caught with dud deals, it was even more amusing to see who read UBS the riot act – Singapore, the same country telling the Western world to work harder for less pay.

The reason Singapore could lecture UBS is that it, through its sovereign wealth fund, the Government of Singapore Investment Corporation, is the biggest shareholder in the Swiss bank with a 6.4 per cent stake, and is very unhappy with UBS management.

The timing and location of this meeting of minds from the East and the West in the UBS boardroom is another lesson. It occurred in Singapore to coincide with the Formula One grand prix. How delicious. The Europeans flew to Singapore for fun and frolics at a sporting event. The Singaporeans were in town for work.

Say no more.

Supply squeeze

ON a less political note, there was an unintended investment tip sheet published last week in the most unexpected place, and by the most unexpected organisation.

The British Geological Survey, birthplace of modern geology in 1835, compiled a ‘risk list’ of minerals needed to maintain a strong economy but in danger of a supply squeeze, which could limit their availability.

Rare earth elements as might be expected, are close to the top of the risk list, which is based on a number of assessments including scarcity, production concentration, and governance in the dominant supplier.

Given the spectacular rise in the price of REEs over the past few years, however, it is surprising to discover that they are not top of the risk list; that position is held by the fire-retardant mineral, antimony.

According to the BGS, antimony scores 8.5 out of 10 for risk thanks to Chinese dominance of output.

Platinum group elements, dominated by South Africa, also score 8.5, along with mercury and tungsten (China again). REEs only rate an eight on the BGS list, along with niobium.

It would be unwise for an investor to react solely on the BGS risk list, though given what has happened with China and the way it has clamped tightly on the REE supply pipeline, it would be worthwhile keeping an eye on antimony, platinum, tungsten, mercury and niobium producers.

Mineral politics

FOR those who harbour doubt about politically inspired supply constraints, such as those seen in the flow of REEs to the world, then consider what’s happening at a copper project once under the control of a Perth company.

Reko Diq, in the Baluchistan province of Pakistan, was a star in the portfolio of local nickel producer Mincor, until floated off as Tethyan Resources, with Tethyan later acquired by a joint venture of Canada’s Barrick Gold and Chile’s Antofagasta.

Today, Reko Diq is approaching the construction phase, just in time for the government of Baluchistan to declare that all copper and gold must be supplied to it for smelting, even though it has never smelted an ounce of either.

What’s happening is that a provincial government is playing the resource nationalism card, and even though it reckons the metals will be processed by a licensed third party, that simply introduces a strong odour of corruption and probably ensures that Reko Diq joins a list of world-class, undeveloped, ore bodies.

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“I like work; it fascinates me. I can sit and look at it for hours.” 

Jerome K Jerome


STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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