Andrew Forrest is right: we shouldn't sell our natural resources at bargain basement prices
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Version 0 of 1. For decades the Saudis have worked on the assumption that restricting the supply of oil to keep its price high was the best way to get rich. And for decades Australian governments, state and federal, have worked on the assumption that building as many mines as possible would make Australians rich. One of these assumptions is completely wrong, and last week Twiggy Forrest was howled down for suggesting that the Saudis might be on to something. Related: ACCC slaps down Andrew Forrest's call for cap on iron ore production The biggest difference between the Saudi approach and the Australian approach is one of time frame. While Australian political leaders have focused on the thousands of short term construction jobs that come from building lots of new mines, the Saudis have focused on the trillions of dollars to be gained by keeping the price high. While Australian leaders are focused on next month’s unemployment figures and next year’s budget deficit, the Saudis understand that because you only get to sell your natural resources once, you better get the best price you can. In the past decade, as world demand for our natural resources grew far faster than anyone expected, the price we received for our coal and iron ore hit record prices. That’s a great problem to have. But rather than cash in on a once-in-a-generation price boom, we decided to host a once-in-a-century mine construction boom. In less than a decade we poured more than $200bn into new resource projects in order to flood the world market with more supply and drive the price down to its current record lows. What a cracking idea. Rio Tinto and BHP are quite upfront about their determination to push the price Australia received for its resources down. Such a strategy might make sense for their foreign shareholders, but it makes no sense for the Australians whose resources they are selling. It gets worse. Not only did building hundreds of new mines all at once drive down the prices we received for our commodities but it also drew thousands of skilled tradespeople out of manufacturing and other industries, driving up the price of building everything from roads to factories. The massive boom in construction, and the associated increase in construction costs, forced the RBA to lift interest rates to “slow down” the non-mining sectors of the economy. Apart from causing non-mining businesses to shut down, the higher interest rates led to much higher mortgage repayments for Australian homebuyers. And then of course there was the exchange rate. The combination of record commodity prices, hundreds of billions of dollars of capital flowing to Australia to build hundreds of new mines, and some of the highest interest rates in the world led to the highest exchange rate in modern history. Bye-bye car industry. The record high dollar devastated tourism, education and some agricultural exports as well. But when Forrest questioned the benefits that flow from foreign companies’ desire to drive down the price of Australia’s resources, the business press went into meltdown. Commentators citing first-year economics talked about the benefits of competition and free trade as if selling a natural resource once and for all was analogous to the market for coffee and as if benefits to foreign steel mills should be of concern to Australian taxpayers. Ross Gittins was the only one to get it right when he stated: Joe Hockey and Competition and Consumer Commission boss Rod Sims must surely deserve a medal for their selfless devotion to the interests of foreigners. Australia has a larger share of the world trade in coal and iron ore than the Saudis have in the world oil market. If you think the Saudis are big in oil, then we are huge in coal and iron ore. There is no doubt that the decisions made by companies operating in Australia and indeed, the policies of our state and federal governments, have the capacity to shape world prices and, in turn, the profitability and taxes paid by companies operating in Australia. At a time when the government points to the falling iron ore price and is complaining it does not have any money we might expect Hockey to join the dots. While the genuflecting towards BHP and Rio Tinto from large slabs of the business community might be expected, it is harder to explain why those concerned about the environmental and economic impacts of mining have been so quiet in their defence of the points made by Forrest. Whether you want to tackle climate change, fix the budget deficit or create long-term well paid jobs for Australian miners, it makes sense to stop the price war between foreign companies seeking Australia’s natural resources at bargain basement prices. |