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The Lord giveth, and the Lord taketh away, so sayeth the Lord. Just over a year ago Quadrant Online carried an article predicting that Chinese steel production would fall from 800 million tonnes per annum to half that level. While that has yet to come to pass, the Chinese themselves are now predicting a similar result, with the deputy chairman of the China Iron & Steel Association saying that a fall in production to 500 million tonnes per annum would be “still healthy”.
If the fall is 300 million tonnes per annum, that equates to a reduction in iron ore consumption of 450 million tonnes. The Chinese themselves are the world’s highest cost iron ore producers, but their iron ore mines employ close to one million people. Let’s assume that Australian producers absorb half the fall, with this equating to 225 million tonnes per annum. Let’s further assume that each person employed in the iron ore industry produces 14,000 tonnes per annum. Those two assumptions mean that 16,000 iron ore miners would lose their jobs. If the employment multiplier effect is three to one, then a further 48,000 jobs would be lost in the West Australian economy for a total loss of 64,000 jobs. Added to the current 93,400 unemployed in Western Australia, unemployment would rise to 157,000 people, equating to 10.7% of the workforce.
Soon after Quadrant Online published the article forecasting a halving of Chinese steel production, FinanceAsia magazine gave the Roy Hill Project it’s “Best Project Finance Deal Award”. The award was certainly deserved because Roy Hill was able to borrow $7.2 billion of a $10 billion project when the iron ore price was already cratering. The four major Australian banks are included in the lending syndicate. A good summary of current iron ore mining economics is provided by Fortescue Mining. In short, BHP and Rio Tinto are the lowest cost producers, at about US$30 per tonne, and the coming reduction in Australian tonnage would be accommodated by Fortescue and the smaller Australian miners closing. The way it works is that the iron ore price will fall to BHP’s production cost, at best, until the excess tonnage closes. Fortescue built its railway line with the same guage as BHP, so BHP will find incorporation of Fortescue’s assets painless.
There will be flow-on effects to the rest of the West Australian economy and history is also repeating itself. Take the example of Westralia Square. This was a empty block of land in the centre of the Perth CBD for many years. In 1988 the site was sold to Kerry Packer for $270 million. Mr Packer sold it in 2003 for $19 million. The site is now called Brookfield Place and is the headquarters of BHP’s operations in Western Australia.
The role of Westralia Square as a CBD eyesore is now being assumed by a vanity project from the Premier of Western Australia. This eyesore is called Elizabeth Quay and to create it the WA Government spent $440 million to destroy a four lane road for east-west traffic — this about a decade after having spent a similar sum to build a four lane, east-west road tunnel. The building sites created aren’t attracting any building and, like Westralia Square before it, are likely to remain vacant for decades. A future state government is likely to fill in the pond created and reconnect the road. The increase in state debt will remain.
Perth real estate prices are now falling and the flow of people has reversed to the eastern states. So far we have had the fall in iron ore revenue but the mine closures are yet to come. The Fortescue presentation provides the metric that federal tax revenue falls by $300 million for each US$1 fall in the iron ore price. So the shortfall in tax revenue from the 2015 budget forecast, based on US$49 per tonne, is easy to calculate. If you use the current Chinese futures price of US$34.75 per tonne, the shortfall is $4.27 billion per annum. It is going to be greater than that for the necessary mine closures to occur.
Ever since the boom started, successive federal governments have increased social welfare spending in anticipation of the boom continuing indefinitely. Any increase in taxation to compensate for the departure from reality will simply further suppress economic activity. The one wild card politically is the effect of unemployment in excess of 10%, at least in Western Australia. Those unemployed might feel that none of the current polity speaks for them. Their concern about global warming, for example, is likely to be very slight indeed. They are likely to be concerned about continued high immigration while they can’t find a job.
Australia as a whole, not just Western Australia, squandered the most recent commodity boom. The ancient Athenians knew better. In 483 BC, a major new vein was discovered in the state silver mines at Laurium. The windfall could have been distributed to the citizens of Athens. Instead, Themistocles persuaded his countrymen to expand their trireme fleet from 40 to 200 vessels. This expanded fleet enabled Athens to prevail against a much larger Persian fleet in the Battle of Artemisium in 483 BC and Athens was saved.
The modern parallel is this: all the money we made from trading with China should have been saved to pay to fight the war that China wants to start. Instead, to pay for that war, the cuts to social welfare payments will be painful for the genuine widows and orphans.
David Archibald’s latest book is Australia’s Defence (Connor Court 2015).
Australian political leadership, particularly concerning economics and defence, has been mostly mediocre at best and downright awful most of the time since the Menzies era and there does not seem to be much hope of meaningful improvement. Still, we get the politicians we deserve. The poorly informed ignorance and apathy of the overwhelming majority of the Australian public is terrifying, which allows politicians to get away with most anything. Small comfort is the fact that it is much the same in pretty well every other country as well.
Well, I think it’s high time I picked up some very cheap BHP shares!! They are currently around $16.00!!!
My other concern is what will happen to bank shares as many of these iron ore projects are heavily leveraged and the banks may have done (our) money!! And it wasn’t so long ago that Marius Kloppers crowed about “the Chinese economic miracle” and how it would go on forever. I always knew there was something wrong with that scenario; the pace of growth was way too fast to be sustainable. Woe betide the business which puts its fortunes into the hands of such a capricious endeavour as mining. And the astronomical wages and conditions of the employees, right down to the most insignificant, was also unsustainable. All this is reminiscent of that old parable about the Tortoise and the Hare.
As Australian taxpayers, we are back again in our familiar role of paying multinationals like Adani (for whom paying corporate tax is an optional activity) to gouge Australian minerals out of the ground and ship them overseas; to their net profit and our net loss. We would be better off just leaving the deposits where they are.
See Richard Denniss: ‘Two Waves Sink Malcolm Turnbull’s Resolve’, Canberra Times. (Sorry, I’m on an Android device and don’t know how to link.)
Yet another ignorant hater of the mining industry. The truth is that the royalty mechanism is the correct way to get value for government. People like you, and Ken Henry, just assumed high mineral prices were here to stay, and that the industry could be taxed into the ground. Royalties ensure the State is paid a fixed percent of the value of the resource. This is a fairer way of distributing the value of the recourse than Henry’s scheme which would give us nothing from a break even operation. Think on it!
PT: I will try not to follow your partonising and abusive example.
The great thing about mineral deposits is that if they are not mined today, when prices are down, they will still be there tomorrow when prices are up again. I suggest you read the Denniss article.
Genuine break-even operations make no profit, and hence attract no tax, especially under a fair taxation regime, which this country does not enjoy at present. Read Denniss on that also.
We taxpayers are paying whoever to come and dig bloody great holes and ship it all away, tax free, save for state royalties. . Meanwhile, the miners enjoy all the infrastructure and facilities that our federal taxes pay for, with a significant number of individuals becoming multi-biiionaires on the way through, and having the ready cash to subsidise whichever political parties best serve their interests; at whatever level: state, federal, or even local council.
Think on that.
Infrastructure and facilities? And what exactly are these? WA’s Great Northern Highway? It’s 2 land and in poor condition considering its importance! I can guarantee you the tax on the diesel used by trucks transporting to mining areas are more than the money spent on that road by a long way.
As for Denniss. An advisor to Bob Brown and head of the very left wing Australia Institute, he’s hardly impartial now is he.
You do realise the iron ore companies paid for the port facilities and railways they use in the Pilbara don’t you? Even the much maligned FMG. You easterners are too focused on coal mining. Denniss had nothing to say on anything (apart from the whinge about companies not paying much corporate tax – note not just mining companies) other than a big whinge on a new coal mine – and whinging it’s a huge hole in the ground. Now he may be right in this particular instance. But you’re extending a comparatively narrow article into a wholesale attack on the mining industry.
As for the rest of my issue with you. The “fair tax” you talk of is presumably that so-called “super profits” tax. Yet you’d admit with lower prices you’d actually see government would get less. My point exactly.
Clearly I need to make the point again and again.
If a mining operation is break even, they still pay royalties. The Ken Henry version would have the taxpayers foot the bill. Think on it!
This is the link to the article you are recommending. http://www.canberratimes.com.au/comment/two-waves-sink-turnbulls-rhetoric-20151217-glqja7.html
What struck me about that article was that while the author is monotonously repeating that a third of multinational corporations paid no tax at all last year, there is not the slightest suggestion that they illegally avoided paying tax. Nevertheless, that is the barely disguised implication. Such is the way of the leftist media while never missing the opportunity to promote the now decisively discredited anthropogenic climate change.
Bill:
Idon’t think Denniss suggested, “monotonously” or otherwise, that all those corporations did anything illegal. Rather, the legalities of the tax system are made to their specs.
The name of the political game is getting the electoral base of one’s political opponents to foot as much as possible of the bill for the running costs of state. That is what Peter Costello set up when Treasurer under Howard; and I think he showed far more flair for it than did Wayne Swan in the Rudd-Gillard-Rudd years.
As for the ‘decisive discrediting’ of anthropogenic climate change: 1. CO2 and CH4 when I last looked were still prominent heat-trapping gases vented to the atmosphere by human activity; 2. and the planet is warming, glaciation is receding and the world’s ocean is rising. But still, in the face of that, the most powerful ‘sceptic’ argument remains: AGW could not possibly be happening, because if it was, it would be bad for established business.
On that point, I think all the world’s ostriches are in agreement. And are with you all the way.
Denniss was dishonest in his prior claims of “subsidy” for resources, and he’s disingenuous on this occasion he’s thrown it in to have a double attack on a proposed Queensland coal mine. However it suits Mr MacDougal’s prejudices, so he throws them in on an article about WA mining. I wonder if he’s aware that the only coal mine in WA is purely for domestic use? Probably not.
Ian,
Sit down one day and bullet point all your arguments, then cross out the ones that are self-contradictory. If there are any left ten they may be valid.
1. “We would be better off just leaving the deposits where they are.” Minerals only have value when you dig them up, so leaving them there produces zero income and leaves thousands unemployed. So, let’s continue your logic: we leave them there for 5-50 years, then discover that nobody wants them any more. In the meantime Brazil, Africa, Libya have supplied the world while we turned our riches into rags waiting for the right moment. In the foreseeable future, Uranium will be overtaken by the much more common Thorium. Copper has a decreasing utility, as does Lead and Nickel. The problem with Iron ore is that we compete to sell it against a lot of others. Coal & Gas? Use those and the planet is doomed, or so we are told by pseudo-scientists, conmen and the scientifically illiterate. Take your pick, one or all of them.
You probably did not think this through, but to establish a mine takes $Bn’s in construction costs. This builds infrastructure and employs people who pay taxes – lots of people. I worked on surveying Mt Goldsworthy, 6-years before it shipped its first revenue earning load. Someone was sinking serious money into a venture they had no guarantee would succeed. Greedy, capitalist swine! Oh, and everyone working in mining pays tax and supports a dozen others, from school teachers to hotel staff – who also pay tax.
How does your proposal to ‘leave it in the ground’ look now? An analogy would be a cattle baron hoarding his herd, watching it grow, but never selling any as by counting their heads he thought he was getting richer, but his rags were real.
2. “AGW could not possibly be happening, because if it was, it would be bad for established business.” I love bananas who join the dots and see apples and carrots. This has nothing to do with being good for enriching any particular person, or corporation, but if we do not create an environment that is good for business, then we impoverish ourselves. Got the gist of how the real world works now, Pancho?
Facts: ”
1. “CO2 and CH4 when I last looked were still prominent heat-trapping gases vented to the atmosphere by human activity;” CORRECT, BUT SO WHAT? ARE YOU AGAINST PLANT FERTILISER? 4 PARTS/10,000 IS DESTROYING THE EARTH? I WON’T BELIEVE THAT UNTIL THE GREEN FAIRY AT THE BOTTOM OF MY GARDEN SAYS SO.
2. “and the planet is warming,” OH, GOOD, IT IS ACTUALLY TOO COLD AT THE MOMENT AND A FEW MORE DEGREES WOULD BE REALLY, REALLY BENEFICIAL. SHOW YOU HAVE AN OPEN MIND AND LIST TEN BENEFICIAL EFFECTS OF AN INCREASE OF FOUR DEGREES OVER THE CURRENT 288 DEGREES KELVIN.
“glaciation is receding” = REALLY? SOME GLACIERS ARE RECEDING AS ONE WOULD EXPECT AS THE LAST ICE AGE RECEDES. WE KNOW THIS, BECAUSE THEY ARE REVEALING THE STUMPS OF PRE-GLACIAL TREES AND EVEN THE FOUNDATIONS OF SETTLEMENTS.
“and the world’s ocean is rising” = THIS REALLY IS STRETCHING EVEN PSEUDO SCIENCE. FOR INSTANCE, THERE IS A HIGH WATER MARK ETCHED INTO A SEA CLIFF IN SEISMICALLY STABLE HOBART BY CAPTAIN ROSSIN 1841. THE REFERENCE POINT 174 YEARS LATER REMAINS UNCHANGED. http://www.john-daly.com/ A SIMILAR MARK AT FORT DENISON IN SYDNEY PRODUCES THE SAME RESULT. JUST TWO CURIOUS, COINCIDENTAL ANOMOLIES? I THINK NOT.
AS A TRUE BELIEVER, YOU RESENT THE ATTACKS ON YOUR VIEWS, YET I NOTE FROM YOUR LAST TWO SENTENCES, YOU LIKE TO DISH OUT A FEW INSULTS. LAST TIME I SAW THIS ATTEMPTED BULLYING BEHAVIOUR WAS IN A SCHOOLYARD, TONTO.
en passant:
I take it that I have blasphemed your Business As Usual religion, and have got you all worked up to the point where you are SHOUTING YOUR HEAD OFF in block caps. My apologies. ..
As for thermometers, tide guages and the like, they all had holes blown in them by none other than Ian Plimer in his ‘Heaven + Earth’, which as you probably know is a total dump on climatology; AGW; the IPCC; the works.
But the U of Colorado maintains a satellite watch on sea level via the Jason and TOPEX series, which has the world’s ocean rising by (from memory) 3.6 mm/yr +/- 0.4 mm/yr. So until I see evidence to the contrary, I accept that the ocean is rising.
And… Being in business myself, I am not against business, capitalism, science or the rest of it.
Ian,
You need help.
“I have blasphemed your Business As Usual religion” – Wrong! We need more CO2 as 400ppm is far too low. Also as the Earth is cooling again we need all the greenhouse gas help we can get.
I did a detailed study in 2010-2012 and:
‘ The conclusion I reached is that 2,000ppm – 4,000ppm is the optimum level of CO2 for the majority of life on the planet, with a probable/maybe rise of 2° – ‘- 3° centigrade increase in temperature, mainly in the temperate regions. Note that US nuclear armed submarines operate with a CO2 level up to 8,000ppm for extended periods without harm to the sailors breathing it. The USN has set a maximum limit of 12,000ppm before they become concerned, so no doubt that still contains a safety margin.
So, to seriously answer the question I think we need MORE CO2 – and soon – as the quiet Sun is going to cause havoc in the coming decades with serious cooling the result. Ah, skiing in Melbourne.”
Now you have some real facts to confound you. I asked Dr. Patrick Moore (a founder of Greenpeace) and he replied that 2,000pp would be the best minimum level of CO2
“SHOUTING YOUR HEAD OFF in block caps” – Umm, No. When I read through my inserted comments I realised that it was hard to separate them from the original text, so I PUT THEM IN CAPS SO SIMPLE FOLK COULD SEE WHAT WAS MINE AND what was yours.
“As for thermometers, tide guages (try gauges) and the like, they all had holes blown in them by none other than Ian Plimer in his ‘Heaven + Earth’, which as you probably know is a total dump on climatology; AGW; the IPCC; the works.” – I have asked Professor Plimer to comment. Perhaps you could explain what the thermometer error bars are. If the recorder (all honest people) makes a mistake of 0.5F then the 1828 temperature in Sydney drops to 53.2F, the highest ever recorded. I do not remember H&E saying that – and I have read the book. If Professor Plimer says one of us is wrong, will you apologise?
“… the world’s ocean rising by (from memory) 3.6 mm/yr +/- 0.4 mm/yr. So until I see evidence to the contrary, I accept that the ocean is rising.”
I thought I referred you to the contrary evidence in Hobart and Sydney … Anyway, thank you for your reference as I looked it up. Let me quote:
“Since the Topex/Poseidon-Jason missions began in 1992, global sea-level rise has occurred at about 3 mm a year, resulting in a total change of 70 mm (2.8 inches) in 23 years, according to researchers.” & “The series has observed about 2.4 inches (6 centimeters) of global sea level rise in 23 years” No error bars are given. As a precaution we should all head for the hills before this 6cm Tsunami washes over our toes. Did you note that if this was globally true then both Hobart and Denison would be under water twice a day. Just a curious anomaly?
Finally, will you list ten benefits of +4C in temperature globally?
You mention the Colorado sea level people. Most of that 3.6 mm per annum is an adjustment for isostasy – almost all of it. Sea level is flat in reality.
David:
“Sea level is flat in reality”.
This I confess is news to me: particularly re how determined. But I am in Melbourne and using an unfamiliar device. I will have to leave off and return to this quite interesting discussion when I get home in a couple of days’ time.
Till then.
You’re in business yourself? Well good for you! And I’m sure you’ve never claimed any taxation reductions or made use of public amenities.
David:
From the site below:
http://sealevel.colorado.edu/content/do-you-account-plate-tectonics-global-mean-sea-level-trend
The ancestors of the original Tasmanian Aborigines apparently walked across what is now the Bass Strait sometime before the end of the last Pleistocene glaciation about 12,000 years BP and the resulting sea level rise. But if “sea level is flat in reality” as you assert it is, and as the Tasmanians’ surface craft were about as primitive as possible, my bet is that they crossed the Bass Strait in one or more submarines. 😉
NB: The sealevel.colorado.edu/ cited present rates of rise are:
CU: 3.3 ± 0.4 mm/yr
AVISO: 3.3 ± 0.6 mm/yr
CSIRO: 3.3 ± 0.4 mm/yr
NASA GSFC: 3.2 ± 0.4 mm/yr
NOAA: 3.2 ± 0.4 mm/yr (w/ GIA)
Ian,
I hope you are just having fun at our expense and do not actually believe what you write. Let’s say every year the sea rises 3.3mm x 100 years = 33cms +/- 4cms. Should my great grandchildren move to higher ground now? I don’t think a 33cm rise is beyond the wit of even Venetian engineers, though they have a subsistence problem that is outside the scope of this discussion. Can you explain to me Why Captain Ross’ 1841 high water mark in Hobart is not yet under water? As another aside, the Baltic is receding as the land springs back after the weight of the kilometres of ice was lifted at the end of the last major glaciation.
Open your mind to the benefits of a warmer world!
PT:
Nothing I have not been legally entitled to; same as any PAYE worker. And public amenities? Well, there is a GENTS down at the local shops I have been known to use.
😉
en passant:
All the scientific bodies I cite above quote much the same rate of sea level rise. And I would not have a clue why that high water mark in Hobart is still high and dry. But I have worked where it was 47C in the shade: repeat 47C. It ain’t fun.
Suggest also you read Mark Lynas on the subject. He has done a lot of research into it.
Merry Xmas.
Ian,
Once more you are playing wilfully dumb – just as my 4-year-old grandson sometimes does.
‘Amenities’ – So you never used a road, mains power, piped water, etc. You must be the last true outback pioneer …
‘Mark Lynas’ – yes, a biased ‘activist’. Keywords as to why he is not credible are: environmental activist – focuses on climate change – contributor to New Statesman, The Ecologist, Granta and The Guardian and The Observer – also worked on the film The Age of Stupid – degree in history and politics published several books – Six Degrees: Our Future on a Hotter Planet (2007) and The God Species: Saving the Planet in the Age of Humans (2011) – He has stated “I think there is a 50–50 chance we can avoid a devastating rise in global temperature.” I have been interested in the climate since a school project in 1963 and intensively studied the evidence for more than a year before producing a 75-page analysis in 2010, updated in 2012 (in time for the Mayan end of the world), so I know a lot more than the biased Lynas. My analysis is available on request.
We are barely warming, but will soon be cooling as the Sun is becoming quieter, so the more CO2 the better. You have still not accepted the ‘open mind’ challenge of listing 10 benefits of a warmer world. If you cannot do so, please say so.
en passant:
You give an interesting list of reasons for your closed-minded dismissal of Lynas. But I suggest you send a copy of your “75 page analysis” to the Royal Society in London. The RS did not make Lynas a Fellow for his work, but it did give him a Science Book of the Year award in 2008 for his Six Degrees. Who knows? They might give you a science award too. Or maybe something for remaining ‘unbiased’: so rare a quality these days. Or for your modesty.
Then again, you probably dismiss the RS too. What would they know? Unlike you, they are all probably ‘biased’.
Still, you could start a blog (for free) and post your work online. Could lead on to fame and fortune. Worth a try, particularly now that your hard scientific slog is done.
😉