Too Much Luck: The Mining Boom and Australia's Future

[redwing]

Too Much Luck: The Mining Boom and Australia's Future

Author: Paul Cleary

Is it possible for anyone to have too much luck? You wouldn't think so, yet Paul Cleary believes that while Australia is often described as the lucky country, what we have is dumb luck, too much luck, more than we know what to do with.

"Too Much Luck" is the title of Paul Cleary's latest book, and in it he reflects on the Mining Boom and Australia's Future. Paul has been reporting on politics and economics for more than 20 years. He's a senior writer with the Australian, and has been an advisor to the East Timor government.

Excerpt below...

Chile, a less affluent resource-rich country, has shown just how inept our politicians and economic experts really are. Several years ago Chile put in place a mechanism to ensure that its politicians didn’t blow the proceeds of the country’s lucrative copper mines. Any revenue above a set threshold went straight into tightly controlled sovereign funds. When the GFC came along, Chile was able to use the fund to deliver an even bigger stimulus to its economy than Australia did, without racking up a single peso of debt. Other resource-rich countries have similar policies. Norway, a country of only four million people, has saved more than $450 billion in just fifteen years. When its oil is gone, Norway will be able to live off the interest, thereby maintaining its enviable standard of living into the future. There are many other examples. The essential idea is to turn non-renewable resources into a financial asset that will last forever….

The Australian economy is now sinking hundreds of billions of dollars into expanding mineral and energy production. Our state and federal politicians have become so bedazzled by the prospect of even greater mineral riches that they are eagerly facilitating a resources stampede while giving less regard to long-term ecological and financial consequences. Increasingly, resource development in Australia involves weak and inept governments up against muscular multinationals that are prepared to go as far as removing political leaders to secure their interests. Such were the dynamics of the mining companies ‘ spectacular defeat of the super-profits tax. Without a fairer tax, Australia will continue traveling at breakneck speed towards the bottom of the quarry, a journey that will wreak havoc on the non-resource sector and potentially leave many people far worse off. As the resource boom accelerates, it will drive the dollar sky-high, forcing up the cost of doing business for everybody. Industries such as tourism and education – industries that, unlike mining, involve many jobs – will fade away. But what happens if commodity prices suddenly collapse, as they did with the GFC in 2008; or worse, when the resources run out?…. without a resources fund, we are stealing from future generations. Without such a policy, this mining boom amounts to theft on a scale never before seen in this country’s history.

Resource prices are currently looking to pull back

Interesting also is that Treasury secretary Ken Henry gave several speeches in 2008 and 2009 about the so-called ‘dutch disease’ – the economic phenomenon where massive growth in the resources sector hollows out and depletes the rest of the economy. This would seem to tie in with the oft commented "two-tier" economy blurbs of late?

 

[Sunfish]

Too much luck is called "Dutch disease". (Apparently they too got lucky once)

The Arabs have the greatest luck of all with their oil but the majority just seem to indolent and poor (They pay "guest" workers to do everything that is beneath them). We could be starting the slide down the same path. We are not using our luck wisely.

 

[redwing]

WA's resources wealth tops $100b

WA's resources wealth tops $100b

Western Australia's mineral and resources wealth has reached record levels, with commodity sales topping the $100 billion mark for the first time last year.

The record mineral, petroleum and gold sales boosted royalty payments to the State Government to $4.9 billion in 2010-11.

Increased sales of iron ore and petroleum into Asia, and in particular China, are behind the increase in exports.

Mines and Petroleum Minister Norman Moore has warned the Commonwealth not to try to cash in on the windfall.

Link

 

[redwing]

Rather than being able to download YouTube faster under the NBN I'm more for looking at the schemes to increase sustainable water resources and food security

According to Department of Water statistics, the Fitzroy River’s annual flow exceeds 9200 gigalitres — more than 30 times Perth’s annual water consumption at 300 gigalitres.

In the East Kimberley, the Ord Dam is discharging Perth’s monthly water usage every 51⁄2 hours.

à la Charles O'Connor's scheme 100 years ago

Food (pardon the pun) for thought

The Future of Science: Food and Water for Life

Throughout the world, an estimated one billion people lack access to clean fresh water, and almost as many suffer from hunger and malnourishment. At the other end of the food spectrum, millions of people suffer disease and ill health associated with overconsumption and poor-quality nutrition. For the first time in modern history, average life expectancies in developed nations such as the United States are projected to decline in the next generation as a result of conditions associated with poor nutrition, including obesity, diabetes, and cardiovascular disease.

Link

African land grab could lead to future water conflicts

China, India and Saudi Arabia have lately leased vast tracts of land in sub-Saharan Africa at knockdown prices. Their primary aim is to grow food abroad using the water that African countries don't have the infrastructure to exploit. Doing so is cheaper and easier than using water resources back home. But it is a plan that could well backfire.

Link

 

[NedKelly]

A very interesting article Redwing. It boggles the mind that with only 22 million people in Australia and all those resources, the majority of us are just one pay check away from bankruptcy.

All we need to do is employ a load of Indonesian or Indian guest workers, pay them $100 a day, which is more than they would get in a year back in their own country. Then distribute the profits among the population and we could all live in luxury and none of us would ever have to work again

 

[Sunfish]

All we need to do is employ a load of Indonesian or Indian guest workers, pay them $100 a day, which is more than they would get in a year back in their own country. Then distribute the profits among the population and we could all live in luxury and none of us would ever have to work again

That's worked well for the Arabs, hasn't it?

If nobody HAS to work, nobody does.

 

[NedKelly]

That's worked well for the Arabs, hasn't it?

If nobody HAS to work, nobody does.

I think that is more a case of "Bukra, inshallah" with the arabs.

 

[josko]

A very interesting article Redwing. It boggles the mind that with only 22 million people in Australia and all those resources, the majority of us are just one pay check away from bankruptcy.

All we need to do is employ a load of Indonesian or Indian guest workers, pay them $100 a day, which is more than they would get in a year back in their own country. Then distribute the profits among the population and we could all live in luxury and none of us would ever have to work again

Would work, if we weren't so damn politically correct! Imagine the unions? They'd have a field day. I could see the pickets :"Racist! Racist!"

No, we are our own worst enemy.

Years ago when the Mining Tax was introduced, in my ignorance I was against it. Why should any company, having invested substantially, employing thousands, already investing in clean and renewable energy schemes...have to pay an extra tax to the Government? This is a great thread redwing and I'll get the book, having now read some of the interviews with Paul. Interesting here about East Timor. http://www.abc.net.au/pm/content/2011/s3316895.htm

Abbott's claims that it will cripple the industry and destroy the economy were ridiculous but on the otherhand,

Rudd's use of the tax was where it all fell down, in my eyes, including the currrent Government's promise to take on a 40% risk for mining ventures that make a loss. So with a 40% tax and a possible 40% loss, and the promise of $1 billion account setup to fund research and exploration....it seems to me that not only would the Mining Companies go to great lengths to make sure that there was a loss...even better than NG , but there would be nothing left over and we'd all be forking out for the $1Billion in exploration! Actually, they wouldn't even have to go to great lengths. What a joke!

I can find very little information on what the Resource Rent Tax actually is and where it will go. I think small business is to receive a 1% CP Tax, meanwhile they are expected to increase Superannuation gradually to 12% Oh well...there goes another employee and another reason not to grow.

Meanwhile, Gillard has rejected the idea that we should set up a Sovereign Wealth Fund.

Have they canned the Mining Tax altogether?

Regards JO

 

[josko]

The average life span declining in the US does not suprise me. Especially as their health system is disfunctional and only affordable to upper classes.

Regards JO

 

[Sunfish]

The average life span declining in the US does not suprise me. Especially as their health system is disfunctional and only affordable to upper classes.

Regards JO

Too much food containing too much sugar and fats, too little exercise and too many drugs both licit and illicit will do that regardless of the health system.

 

[Dazz]

Resource prices are currently looking to pull back

Um, perhaps spot resources may be pulling back.

Fixed contract prices with known escalation clauses throughout the term of the Contract are not pulling back, they are increasing.

Woodside's first 25 year contract to supply LNG to the Japanese, signed back in '82 just finished. That was stable, and thru the smaller trains 1, 2 & 3 set up the whole show.

Woodside's 30 year contract to supply LNG to the Chinese, signed back in 2005 has a while to run yet. This contract underpinned the construction of their 4th train on the Burrup. It ain't going anywhere in a hurry. Super stability.

The big train 5, underpinned by the 100% Woodside owned Pluto reservoir is trucking along nicely as well. These assets form the bedrock of WA's powerhouse economy. They ain't going anywhere, and do not march to the beat of some short term 3 year cyclic Melbourne or Sydney anything.

Big iron ore supply contracts, by BHPB, Rio, Atlas and HPPL are all very lengthy in term and have many decades to run, all guaranteed revenue to both the company, the state of WA and the Fed Govt. They aren't being threatened at all.

This yo-yo panic reporting by journalist squirrels who aren't privy to the confidential terms of the Contracts have no idea....and so can only comment on the ever fluctuating spot price, which in terms of volume and significance, is nigh on irrelevant.

....but, it does sell papers and fill slots so TV licence holders can intersperse it with ad space....so they shove it in. The consumers and public who also aren't privy to the confidential terms of the large Contracts to Supply, lap it up on a Sunday morning when they watch it on some pretty graph presented by someone not in the industry at all.

....and so the wheel turns and we all bumble along blissfully ignorant of the real contractual status.

 

[NedKelly]

Big iron ore supply contracts, by BHPB, Rio, Atlas and HPPL are all very lengthy in term and have many decades to run, all guaranteed revenue to both the company, the state of WA and the Fed Govt. They aren't being threatened at all.

It wasn't so long ago that China stopped bulk carriers docking because they had too much in stock. Do you think they would buy the stuff if they didn't need it or just reneg on the contract?

 

[Dazz]

Do you think they would buy the stuff if they didn't need it or just reneg on the contract?

History has shown that when a sovereign Govt, especially the ones who have inked them so far, signs a lengthy supply contract, they actually take the supply and pay the bill. That has been the overwhelming experience.

I don't know of one example, from any product or any country that WA resources companies have been supplying in the last 30 years, who have not honoured their contractual commitments.

The penalty clauses (both financial and reputational) are so severe, both on the supply and acceptance side of the contract, that neither party wishes to go there.

To me, it's a non-event.

Folks waiting for the mining boom in WA to back off, better pull up a chair and bring a big book to read, they are in for a long wait.

 

[tom32]

History has shown that when a sovereign Govt, especially the ones who have inked them so far, signs a lengthy supply contract, they actually take the supply and pay the bill. That has been the overwhelming experience.

I don't know of one example, from any product or any country that WA resources companies have been supplying in the last 30 years, who have not honoured their contractual commitments.

The penalty clauses (both financial and reputational) are so severe, both on the supply and acceptance side of the contract, that neither party wishes to go there.

To me, it's a non-event.

Folks waiting for the mining boom in WA to back off, better pull up a chair and bring a big book to read, they are in for a long wait.

Dazz I can think of a few, one which I was unfortunate enough to own shares in...

Yes the Australian companies attempt to pursue their rights but especially smaller players are smashed hard by the market when they have their buyer pull out of contracts that they are often left unable to claim anyway.

I have owned them so know only too well what happens... Mt Gibson (MGX) springs to mind. First one chinese company pulls out of their contractual obligations in 2008, then second chinese company buys them for a song... We think capitalism is the best economic system, sometimes I fear we are getting played.

On long term contracts, I agree mining itself will carry on, the issue facing WA is not whether we will be exporting ore but as spot price falls expectations fall which slows down the capital works. At present it is capital works that is employing lots of west Australians and when this ends it will hurt as it has hurt in every other commodities cycle since mines were more than a hole in the ground.

I was actually surprised this morning to hear Andrew Robb say we are half way through this boom, or more like 2/3 of the way through... As though it was a statement of fact. I believe it is that it will one day come to an end, but the question is when?

To be clear I am talking about capital expenditure by miners not the end of mining. I hope it can go on forever but given that my income is dependant on a growing economy I tend to invest defensively so I either lose my job and my small investments survive or I keep my job and my small investments remain small.

 

[Ausprop]

I was actually surprised this morning to hear Andrew Robb say we are half way through this boom, or more like 2/3 of the way through... As though it was a statement of fact. I believe it is that it will one day come to an end, but the question is when?

that's a bit nuts seeing as hope downs is still at the embryonic stage, wheatstone not even formally announced (tho I havent read the news yet), bhp barely started on their ramp up - and that's just 3 off the top of my head.

 

[tom32]

that's a bit nuts seeing as hope downs is still at the embryonic stage, wheatstone not even formally announced (tho I havent read the news yet), bhp barely started on their ramp up - and that's just 3 off the top of my head.

It is supply coming on line which is indicative of the end of a cycle.

The market usually moves before the actual supply is on line, and has a predictive power around this.

You are talking about much supply on line in as few as three years. I don't know about elsewhere but looking at Port Hedland in isolation; their exports in 2015 will be in excess of Australians in the late 90s. Do you think in say 18 months people will not see the writing on the wall? I don't know maybe they won't and we will go on growing capacity to feed insatiable China but this would certainly make this boom different to previous ones...

Anyway, I have no way of knowing when it will end, only that it will end. Usually it is the supply side that finishes an industrial cycle not demand side. It will be said china has slipped 5% or some other nominal number but it will be our supply side tripling that really smashes the market.

We keep looking at China, Greece and all this stuff and yet if you project our own supply response along with Brazil, India and of course China's own not insignificant response domestically and in Africa the picture it paints is not a sustainable one in my opinion even medium term let alone long term.

If I had to bet I'd give it another 12 - 15 months.

 

[Sunfish]

If I had to bet I'd give it another 12 - 15 months.

I'd take that bet.

It will be the best performing asset class for another ten years.

 

[MarkB]

In 2007, the BRW said that they thought the resources boom would last 50 years (give or take).

Not sure what their recent comments have been?

 

[tom32]

I'd take that bet.

It will be the best performing asset class for another ten years.

Hmm, it is hard to guage what odds the market can give me... It sure aint 50/50 though.

What are you suggesting 4 to 1, For my terms? I think it will be easy enough to guage if the investment boom is over or not though perhaps clearer terms would be better?

If you mean your terms of best performing asset class I would give 50/50 for this, and in this I would be robbing you blind, so of course happy to oblige. As we are only allowed freindly bets here how does $50.00 sound? Retrospectively finding a better peforming market in 1 or 5 or 10 years would not be difficult.

 

[Sunfish]

Purely rhetorical Tom. I just have a different opinion which is as valid as yours.

Why do you want odds anyway? Besides, nobody rings a bell on these things. I would claim to be a winner if I'd had a punt that the property boom would be a property bust by now but I'm sure no bull would pay up.