Monday, 16 June 2014
All the Comedy fans out there will immediate associate “Nothing to See here, move along” with Frank Drebin in Naked Gun 2 1/2, standing in front of a burning Fire works factory. The scene tells a thousand words.
The Gas Lighter
We recently had a burning Fireworks factory moment, and sadly everyone moved on. Not sure if that was because it was a small article on page 23 of a mid-week paper (probably a celebrity break up or petty politics stole the thunder on the front page), but surprisingly even experienced commentators didn’t pick up on the significance of the announcement.
China signed a $400 billion gas deal with Russia, undercutting Australian prices significantly. Russia’s sales price was $9.90 per MMBTU against Australia’s export prices of around $18 per MMBTU. Whilst it is not an apples for apples comparison (the Russian project includes a 2500+ km pipeline from Russia to China’s border), the project will cost about the same as the Western Australia’s Gorgon Gas project, but produce 80% more gas. Australia’s “next big thing” in resources development was supposed to be Gas exports. Most of the development activity in this market has been against forward contracts. Now the market for that has been soaked up, and it has made $180 billion in future projects unlikely to commence, with a high probability that future contracts will be at lower rates. It is due to be completed by 2018, but could take until 2020 – which is still much faster than we appear to get projects to market (even the smaller ones). This will be a big hit to our Resources sector, and in turn our employment, taxes and prosperity. Hopefully our Gas sector is not like a fart – a bad smell we regret, that lingers for a short while before dissipating.
The Boston Consulting Group just released their latest Global Mining Survey. Whilst it identified that major commodities prices fell 8-10 percent last year that impacted on the profitability of all Mining companies (irrespective of country), there was a much more concerning finding. Mining Costs in Australia increased 312% in the past decade. The next worst ones were Chile (up 256%), Canada (192%), and USA (149%). These figures refer to copper, by comparison we are even worse for coal. Costs in the Australian Mining sector must be slashed by a third, just to match the second most expensive overseas market. In the decade to 2012, costs grew at an annual average compound rate of 11% - how we couldn’t see the smolder before the fireworks factory caught alight is quite surprising. Rio Tinto in particular (but also others like New Hope and BHP) are now working on cost reduction strategies, but we are still only at the start of this mammoth task. Hopefully Rio Tinto’s go ahead on the $20 billion African Simandou Iron Ore project isn’t a fire cracker across the bow of pending production shifts out of Australia.
Parts Supply now a Top Priority for Australian Miners
On a more positive note, a Survey of Australian miners by Timetric found that “availability of replacement parts” was one of the top factors when choosing an equipment supplier. Keeping your machine running is obviously essential to your business, which is why more and more Earth Movers are looking to RD Williams to provide your Total Earth Moving Solution. With over 40,000 line items in stock, we are your prime partner in fulfilling all the other main findings from the Survey also: product quality and reliability, reliable and short delivery times, and helping you contain your overall maintenance costs. Lots to see at RD Williams, and I’d like to think we put on a good show too!
Why do foreigners invest in Australian businesses?
So, with so many investments looking unattractive to Australian investors, the logical question is: why is it attractive to foreign firms to buy existing firms in Australia? There are several reasons:
- Foreign wealth funds invest in Australia to ensure they can guarantee future supply of resources.
- Their investment criteria are long term focused, whilst we expect “immediate” returns.
- There is no requirement for foreign companies to build or develop anything, so rather than go for Greenfield opportunities that have to grow and compete, they buy established businesses with known outcomes
- But the biggest one of all is tax discrimination. Australians have little choice but to declare and pay tax on their profits here. Foreign companies have avenues available to them that reduce (or even eliminate) tax in Australia (for instance playing with transfer pricing). One example is Apple, paying only 0.7% of its turnover as Tax in Australia by declaring nearly all its global income in Ireland at near zero tax levels.
There have been some positive signs in our economy of late, such as rising construction activity, a decrease in businesses collapsing, an improving Tourism and Retail sector, and an intention from all our Governments to invest in the country through Infrastructure development. Mining and Manufacturing are on the downside though, and will take years to turn around. We should have all been using the last 5 or so years to get our house in order, as the fireworks show is just about to start. I don’t like to be a doomsayer, but the fact is that we’ve had it extremely good for two decades now. We have come to take this for granted, and a correction is well overdue. Hopefully we’ll be able to just enjoy the fireworks, whilst moving right along with making the required changes to improve our competitiveness into the future.
As always, onwards and upwards!