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Australian Mining Report Worried About Guinea’s Political Stability

September 8, 2011

The ANZ report includes a handy running sheet of our most likely challengers in the race to sate emerging world demand.

In iron ore, we run up against established player Brazil and the known unknown, Guinea.

Brazil has reserves of quality and quantity, a growing share of the global market and is set on making material improvements to its ability to compete through the construction of a new fleet of mega-freighters that will slice 40 per cent from shipping costs.

And Guinea, well, its potential is hard to assess right now. What we know is that it has probably the best quality ore going around and in the sort of volumes that has three majors, Rio Tinto, Vale and BHP Billiton, waiting on political stability to sustain massive investment.

Boom will go pop if we rest on our resources laurels

AUSTRALIA’S place at the vanguard of the beneficiaries of the long boom in global commodities will be challenged over the next half a decade as the mining industry enters phase two of a massive supply-side response to the enriching surge in demand from the emerging economic world.

There would seem to be two central themes to the assessment of Australia’s appropriate responses to the commodities super-cycle prepared for ANZ by Port Jackson Partners and others.

The first is that the demand story underpinning our current national prosperity will sustain and challenge us over decades, not years.

And the second is that our own intellectual indolence, in combination with a spike in the competitiveness of current and emerging suppliers, looms as a key risk to our ability to maximise the astounding potential of this epochal shift in the global economy.

This idea that competition for a representative share of the second phase of the global industry’s supply-side response strikes at the heart of one of the abiding, diverting myths of the modern Australian story — which is that, as a nation, we are fortunate in our over-endowment of high-quality minerals and energy deposits.

The reality is, of course, that we host a relatively modest slice of the global bank of what are our key mineral commodities, and that luck has had very little to do with the effective extraction and monetisation of what we do have.

Our rightful claim on various levels of leadership in the minerals, energy and food game is the product of generations of efficient deployment of human and financial capital that has allowed us to make the most of what we choose to extract or grow.

As golfing great Gary Player famously said in response to those who commented on his routine good fortune: “The harder I practise, the luckier I get.”

The ANZ Insight report makes it all too clear that now is no time for Australia Inc to stop practising.

As this report makes abundantly clear, Australia has nothing like a “monopoly on high-quality mineral and energy resources”, and neither is it unique in owning a competitive position on the cost curve across its suite of hard and soft commodities.

Just on those rural commodities, it was very interesting to hear ANZ chief economist Warren Hogan predict yesterday that China would become a net importer of food within two years. As we have observed often over the past couple of years, the urbanisation of China, India and a host of others through our region is likely to put as much pressure on global food production as it has on the hard commodity sector.

It is hard to predict the consequences of a calorie boom, but one thing that the markets might need to start contemplating is when, rather than if, the New Zealand dollar hit parity with the US dollar. Chinese demand for milk powder and other dairy products has already started to recast NZ’s export economy and, if this report has got it right, that trend to demand growth will compound quickly.

But what of these competitive pressures that the report identifies? I mean who on earth can be as lucky as Australia when it comes to minerals and energy?

Well, there are quite a few actually, and many that will be far more welcoming of China Inc’s approaches to provide oodles of investment in return for greater levels of ownership or influence over output than more mature economies like Australia might be.

The ANZ report includes a handy running sheet of our most likely challengers in the race to sate emerging world demand.

In iron ore, we run up against established player Brazil and the known unknown, Guinea.

Brazil has reserves of quality and quantity, a growing share of the global market and is set on making material improvements to its ability to compete through the construction of a new fleet of mega-freighters that will slice 40 per cent from shipping costs.

And Guinea, well, its potential is hard to assess right now. What we know is that it has probably the best quality ore going around and in the sort of volumes that has three majors, Rio Tinto, Vale and BHP Billiton, waiting on political stability to sustain massive investment.

Then there is our other big earner, coal. In thermal coal we are in a race with fellow low-cost, big reserve producers like Indonesia, Columbia and the increasingly challenged South Africa, while in metcoal we have recently seen Rio spend nearly $4 billion buying big in Mozambique, and the potential of a suite of deposits in Mongolia has the coal world abuzz.

And then there is the real mover on the Australian commodity scene, liquid natural gas. A host of investors, both local and international, are already locked into maybe $US120bn ($113bn) of construction projects as they move to tap gas resources in Western Australia and Queensland. And there is plenty more where that is coming from.

But to secure the newgen spend, Australian projects will be competing with similar developments in the Middle East, with a likely move of US unconventional gas into export markets and with whatever gas China is able to extract from the sort of deep coal fields that are the source of Queensland’s LNG boom.

Australia cannot afford delusions about its attractiveness. Yes, it is a far safer bet right now than, say, Guinea, but sovereign risk might not be the disincentive to resources-strapped China that it is to an options-rich mining major.

It must be observed that it is entirely refreshing to see ANZ investing its executive time and shareholders’ money on this quality of research and analysis.

All sides of politics should recall Australia’s last great reform phase was informed by an enormous amount of broad participatory community discussion about the issues facing Australia.

What Australia needs right now is more than just a rapid improvement in the tone of the dialogue between government and business. We need the government to recognise the standing of a far broader community of inputs in the quest for a more productive national dialogue on reform, just as we need business to refresh its ability to provide solutions-driven research.

As RBA governor Glenn Stevens suggested on Wednesday, we need to acknowledge the problems generated by our buoyant national economic circumstance but not at the cost of failing to identify the opportunity in front of us. Now, we are not being “The babe they called Brian” here. This is not a matter of always looking on the bright side and singing a happy song while we are hanging from a cross. The ANZ assessment is not only that the commodities cycle will buttress our national wealth for at least another generation, but that the benefits of the boom are already being seeded through a far broader sweep on the economy than is conceded by the doomsayers. And the prediction is the rural sector will be the next to feel the heat of Chinese demand as it becomes a net importer of food.

One of the most interesting elements of the report is that it identifies the rise of a cluster of supporting industries that are orbiting around the miners.

So confident is one of the authors of the report, Port Jackson’s Angus Taylor, about the continued growth of these clusters that he was happy to predict that Australia stood a good chance of growing “mining’s Haliburton”.

That potential needs to be driven home to government and to be fully and simply expressed to a community whose appreciation of the prosperity being created by a structural shift in demand for miners, energy and food is being clouded by the growing pains of success.

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