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Matt Grudnoff

Matt Grudnoff

Like a man who buys a cheap house next to a pub and then complains that the noise late at night is depressing his house price, the Minerals Council has come out and complained that Australia is now an expensive place to do mining.

The Minerals Council of Australia released a report by Port Jackson Partners that pointed out that cost pressures are increasing in the mining industry. It showed that since 2007, the cost of producing new capacity in thermal coal and iron ore has almost doubled. It claimed we have also lost our dominance in mining competitiveness to other nations around the world.

Then in predictable fashion, it called on the Government to fix all their problems. Large global mining companies thinking governments have all the answers – whatever happened to market forces?

They called on government to address infrastructure bottle necks, falling productivity, skills shortages, and even went as far as calling for relief from the high exchange rate. They asked for all of this without ever mentioning that all these economic problems are caused by the mining boom itself.

This is because the mining industry is intent on building too many new mining projects at the same time, as well as exporting as much dirt as they possibly can.

A recent economic impact assessment commissioned and paid for by Arrow Energy for its proposed LNG plant in Gladstone highlights what effect the mining boom is having on Australia.
The report says that because the LNG plant would increase gas exports, it would have the effect of maintaining the strength of the Australian dollar. It is the increase in mineral exports, including gas and oil, that is causing the high exchange rates. But rather than point that out, it is more convenient to complain that the high exchange rate is increasing the cost of doing business.

Also, because the mining industry wants to export their minerals in greater quantities, they are creating infrastructure bottlenecks as they overwhelm their existing infrastructure. Again, the strategy appears to be to call on government to fund more infrastructure.

Arrow’s LNG report goes on to say that the plant would be built at a time when many other similar projects are being constructed. It would therefore be competing for what it describes as “constrained labour resources”. The report then says that because of the high salaries the LNG project can offer, they “will attract labour away from other businesses both locally and further afield”.

Put simply, the mining industry is paying higher wages to poach staff from other businesses. By wanting to construct all their projects at once, they create excess demand for key professions and push up the cost of construction. The next step is then to complain that the cost of doing business has also gone up.

The Minerals Council report also notes the fall in productivity rates in Australia over the past 10 years, and suggests this is something the government should be concerned about. A closer look at the productivity numbers shows that mining productivity has seen the biggest fall over the past 10 years and this is dragging down Australia’s overall productivity rate.

The big drop in mining productivity has been mostly caused by large investments in new mining projects that have not yet started to produce, along with the fact that the mining industry is mining increasingly less productive deposits. They are doing this because these less productive deposits are still profitable due to the historically high commodity prices.

Of course, faced with falling productivity rates caused in no small part by the mining boom, the solution seems to be to call on government to stop slacking and do something about it.

Fortunately there is a solution to all the problems the Mineral Council’s report highlights. The government could always take the pressure off by slowing the mining boom. Just like the Reserve Bank increases interest rates to slow the economy when it’s running too hot, the government can ration out mining projects so that the mining boom doesn’t run too hot.

Of course, the mining industry is not interested in that solution. It is far easier to complain about the rising cost of doing business, demand the government do something about it, and then just hope nobody notices the hypocrisy.

Matt Grudnoff is a senior economist at The Australia Institute.

May 7, 2012

THE head of one of the world’s largest engineering and construction companies, KBR, has told US investors he is worried about the expensive labour market in Australia, which has made flying in construction workers for resources projects cheaper than hiring locals.

The KBR chairman and chief executive, William Utt, said there was a ”very high cost situation in Australia” when it came to liquefied natural gas and that although the nation was blessed with an abundance of natural resources it also faced a number of cost disadvantages that made other regions, such as east Africa, more attractive.

”We do worry about the labour market in Australia, and we can land expats in Australia for about the cost of what we’re hiring directly for construction workers,” Mr Utt said during an earnings briefing.

The downbeat assessment comes as the Reserve Bank last week in its statement on monetary policy said it was concerned about rising labour costs and sagging productivity.

The LNG sector, a booming business for the Texas-based KBR, is one of the engines of Australia’s growth, with eight projects around the country under construction valued at more than $175 billion.

KBR’s directors include former Telstra chief executive Frank Blount.

Because of the high cost of labour in Australia KBR was forced to diversify its business, which included investing in other regions, he said.

”You get some wonderful resources and so there is some viability there in Australia, but we also want to hedge our bets. We think some of the east Africa LNG reserves that are very prolific will have structural cost advantages … compared to what we’re doing in Australia.”

KBR has been involved in the North-West Shelf project, Gorgon, and is looking to participate in Woodside Petroleum’s $30 billion Browse LNG project along with further work on its $14.9 billion Pluto project.

Mr Utt said Australia was competing in a global market when it came to developing these energy assets.

”There is a concern of how you best rationalise the resources of gas in Australia, particularly where the broader competitive environment [in] North America and east Africa gas [continues] to develop.”

Rising wages and the cost advantages of other regions is also of concern to the industry peak body, the Australian Petroleum Production and Exploration Association.

In its recent submission to the Fair Work Act review, the association said there was anecdotal evidence of an escalation of cost increases in excess of 35 per cent over one year in some offshore oil and gas construction projects. This could endanger the estimated $330 billion in planned investment in the sector.

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