Commentary: Australia, its economy and mining

You can expect a salary of A$150,000 or more as a truck driver at a remote iron ore project in Australia. The country has been one of the biggest beneficiaries of the economic boom in China, having grown continuously for more than two decades. During our site visit in the Pilbara area with Novo Resources, my companion’s bill of A$26 for a packet of cigarettes (which was at least five times more expensive than what he would have paid in Europe) and our bill of A$50 for a carton of small water bottles (which was about 25 times what it would have been in Singapore) shows how Australia — from a backpacker destination a decade ago — has become one of the most expensive places in the world, competing with Switzerland and Norway.

The domestic airports were filled with miners, truckers and all-and-sundry flying in and out for their weekly shifts to remote areas. They would report straight to work after disembarking. Lack of women, alcohol and the lifestyle are blamed for why companies must bear the costs for all this flying in and out.

Australia’s gross domestic product (GDP) per capita on a nominal basis is US$61,137, and US$44,346 on a PPP basis. In other words, while to an Australian it is an average rich country, its currency is overvalued by around 30%. Part of reason why this happens can be attributed to the convoluted economic structure resulting from government interference. Australia’s economy has strong elements of redistribution, with high minimum wages, and control on immigration at the lower end of the skills spectrum, creating an unnatural shortage of workers. As a result of manpower shortage, it’s not only workers in remote mining areas that are overpaid — this seriously affects salaries all the way to cities. Add to that generous unemployment benefits. These policies strongly influence the transfer of earnings from what in a free market would have accrued to the capitalist, to instead flow to what would have otherwise been lower-salaried workers.

From a short-term perspective an egalitarian would say this is utopian, but it pressures under-investment by driving down return on capital and makes manufacturing less competitive, which  is bad for the workforce long-term. Earning too much too quickly — and not so much based on an individual’s habits and traits, but because of access to natural resources and government’s policy of redistribution, and restrictions on immigration and enforcement of minimum wages — has created many cultural problems. Casinos, brothels and drunken rowdiness are some of the symptoms. A lot of this new-found money has gone into expensive yachts, overpriced condos and conspicuous consumption.

Mining drives the Australian economy, with iron ore and coal being its two biggest exports. Such benefits from natural resources — if not accepted as a windfall, and not sequestered either into a rainy day fund or back to the investment cycle — will come back to bite eventually.

Irrespective of what happens to China’s growth rate, the Australian dollar is too expensive and its economic structure is convoluted, as a result of sudden increase in demand from China and Australia’s failure to bring in outsiders to work. Its salaries at the lower-end are too high. It is over-regulated and over-taxed, and the government gets away with this due to the high demand for resources. Among the locals this has created a culture of entitlements (through fixing minimum wages too high), a fear of foreigners (who would be happy to work for a lot lower than what residents get paid), a consumption-based economy (with the service sector representing 70% of GDP) and a stagnating manufacturing sector.

So what does all this mean for the future of Australia’s mining?

Capital has no nationality. Trying to look for a better deal, it will directly or indirectly force reduction of regulatory burden and salaries, once the benefit from the sudden spurt of demand from China is over. Failure to reduce these burdens will only mean a continual, strong pressure to devalue the Australian dollar. If Australia chooses the former, it will make itself lean and competitive, without becoming less rich as a nation. The latter will raise the competitiveness in what it exports by making the country less rich. Whichever path Australia takes, these pressures will improve relative competitiveness and return on investment of companies with value addition in Australia, with mining being one of the biggest beneficiaries.

It is worth paying attention to companies with projects in Australia.

— Jayant Bhandari is a mining analyst and an advisor to institutional investors. He writes often on political, economic and cultural issues and runs a yearly seminar in Vancouver called Capitalism & Morality. This edited commentary is based on the author’s one-month visit to Australia in September 2014. For more visit http://jayantbhandari.com