A COST crisis threatens to stall mining mega-projects and shrink the national economy by 5 per cent unless Australia commits to controversial policies to regain its competitiveness, including loosening restrictive rules on enterprise migration agreements used to source foreign workers.
Landmark modelling to be released today by the Minerals Council of Australia and obtained by The Australian warns that labour costs in the mining industry are among the highest in the world, while rapidly soaring capital costs have made new thermal coal projects 66 per cent more expensive to build than the global average. Iron ore projects are 30 per cent more expensive to build than the global average.
The slump in the attractiveness of Australian projects comes just as resource-rich rivals — including the Democratic Republic of the Congo, Mongolia and Mozambique — are developing previously untapped reserves, the research warns.
The paper, produced by Port Jackson Partners, concludes that real GDP in 2040 would be 5.3 per cent lower than it would be if Australia were to take action to boost competitiveness.
Without improved competitiveness, real GDP would grow from $63,617 per person in 2010 to $97,111 in 2040; but it would rise to $102,511 in the modelled scenario where Australia has a “competitive edge”.
This equates to a cut of more than $5000 per person in today’s dollars and 6.3 per cent lower real wages.
“Policy decisions made now can create or destroy an economic opportunity equal to more than 5 per cent of the Australian economy in 30 years, with lower minerals industry growth quickly translating into poorer economic performance,” the report states.
The report will assist Julia Gillard’s efforts to talk up the longevity of the mining boom as it declares that neither a temporary slowdown in China, nor weakness in developed world economies or plunges in commodity prices will put an end to the boom.
But the report also creates a headache for Labor as it foreshadows a fresh policy brawl if the government scraps the diesel fuel rebate as part of its push for budget savings, revealing the move would impose cost increases of 4 per cent to 7 per cent on typical minerals projects.
Unions also are likely to be angered by some of the reforms demanded, such as measures to stop wage cost super-inflation by using skilled immigration and redirecting workers from manufacturing jobs in the eastern states to minerals jobs in Western Australia.
The Minerals Council argues such reforms are needed to lift competitiveness and stop more projects falling victim to a high-cost business environment.
Last month, BHP Billiton shelved its $US30 billion Olympic Dam project in South Australia and a planned outer harbour development at Port Hedland in WA, while Fortescue has cut back its expansion plans in the Pilbara and other projects, including Woodside Petroleum’s Browse project near Broome, have been delayed as costs soar and rival nations push for their assets to be
Preliminary results of the modelling were detailed by Port Jackson Partners’ senior partner Angus Taylor in late May, but the Prime Minister criticised Mr Taylor as “talking the economy down” because he has preselection as the Liberal candidate for the seat of Hume. Today’s report undermines Labor’s political message on the mining boom, which has focused on the
redistribution of the wealth it has created.
“At present, the national dialogue on Australia’s mining industry focuses primarily on how to distribute the earnings of the minerals sector, not on actions needed to ensure those benefits continue,” the report finds.
“There are calls for higher taxes on minerals producers, tighter restrictions on temporary migration to ensure jobs are filled by Australians, and new measures to force resource developers to source inputs from domestic manufacturers. Although still minority policy positions, these claims have gained increased prominence in recent times.”
Today’s report paints a grim picture of the outlook for commodities sectors where Australia has traditionally enjoyed success.
The majority of the project pipeline for thermal coal, which is used heavily by Chinese power stations, is at risk because projects in other countries are overwhelmingly more attractive to investors.
Every year, the completion date for thermal coal projects in Australia is delayed by a further three to four months, while low-cost producers such as Colombia seek foreign investment in their projects.
Aluminium has few prospects for growth as Chinese and Indian producers have cheaper capital costs in smelting, while countries in the Middle East have access to cheaper energy.
By 2020, it will be cheaper to ship Brazilian iron ore to China, except for the most established, premier projects in the Pilbara.
And the shelving of Olympic Dam has cast doubt on the future of the copper industry as other copper projects are small and uncompetitive.
To address the cost pressures, the report calls for a more mobile workforce as workplace policies make it “needlessly difficult” to attract workers.
Specifically, it says that rules around enterprise migration agreements should be loosened and the threshold for protected industrial action lifted.
Despite the government’s move to increase incentives for major projects to use Australian content, the report insists projects must have unfettered access to the most competitive supplies of inputs.
The report calls for increased national savings and says the exchange rate is “unnecessarily high” because of a “failure to run sustained budget surpluses”.
The report urges higher enrolments in minerals-related higher education and improved quality in the courses, reforms to approval processes to reduce delays, and stable tax and royalty regimes.
To arrive at the 5 per cent figure, the modelling contrasts two scenarios. The “headwinds” scenario assumes the minerals resource rent tax and carbon tax stay, the workplace relations system is
maintained, project approvals delays continue and there is inadequate investment in education and innovation — prompting investors to apply risk premiums similar to those applied in Brazil or Chile. The “competitive edge” scenario assumes the MRRT and carbon taxes are not levied and state royalties are stable.