A longer-term outlook and more centralised bipartisan energy and infrastructure policies needed to increase sector competitiveness and maintain Australian living standards

The effects of the Australian mining and energy industry downturns over the past few years have been far reaching and continue to challenge companies to adjust to, and sustain a new business and operating modus operandi.

As an industry heavyweight with over 46 years’ experience, Siecap advisory board member Rob Neale has lived through more cyclical ups and downs than most. The former President of the Queensland Resources Council and former Group Managing Director of New Hope Corporation believes that one of the most significant trends affecting the mining industry is the overarching issue of dysfunctional State and Federal government policies concerning resources, energy, infrastructure, taxation and climate change. These policies provide the investment context for new and expansion projects, market development and productivity initiatives.

“The recent downturn has developed three groups of successful operating companies: some very large corporates, a few top-class explorers and some niche ‘mid-caps’. Over time, these companies have shrunk their businesses into profitability, and they have made significant productivity capacity increases in a tightly full-cost controlled environment – sweating their assets as hard as practical”, Rob explains.

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The recent commodity price increases should not be allowed to become the catalyst for a return to the poor management practices of the recent mega boom.  In his view, mining companies must now lock in cost control and cost management as the new operational norm. “Global growth is currently well below 3%, which is the minimum needed to drive global commodity consumption increases to warrant new production investment, and there is still an overhang in production capacity in a number of commodities”, he says.

Against this, there is a continuing global political rebalancing underway accompanied by increasing political polarisation, which collectively affect local and international markets. Rob believes that this has led to corporate boards becoming more and more risk averse. There is an expectation of very fast investor capital return, when the industry really needs to adopt a 20-25+ year outlook in most cases, especially for large capital intensive projects.

People, especially politicians, seem to conveniently forget that Australian economy and living standards since the 1850’s have occurred primarily due to foreign capital in the resources and agricultural sectors; initially from the United Kingdom followed by USA, Japan, Korea and more recently China.  While new industries are evolving, it will be some time before they have the horse power to replace the economic impact of these traditional industries, which also continue to innovate with new technology initiatives to remain globally competitive and commercially viable.

Capital is a global commodity that moves exceptionally quickly in today’s electronic age.  Additionally, there are many more projects globally than available capital funds, with capital moving to lower risk opportunities with competitive tax regimes.  Australia is not a competitive tax jurisdiction and has increasing sovereign risks due to uncoordinated, non-integrated policies and short term political expediency.

Mr Neale has seen the corporate world become increasingly uncomfortable with the state and federal policy disarray. “Quite frankly, you look at our tax regime and the continuing decrease in Australia’s share of available foreign capital over the past 5-10 years; clearly investors believe there are better places in the world to spend their money”, he says.

Sovereign risk is another very real factor in this country, according to Mr Neale, as projects are failing to progress. Governments regularly change their views on project and infrastructure developments, and that creates a very tough background upon which to make investment decisions covering 20+ years’ operating horizons.  Today it can take up to 10 years just to get government approvals in place for project development, with on-going risks of government bans influenced by non-elected foreign funded activists, fake news and biased media seeking “Gotcha Headlines” and infotainment rather than providing well researched commentary for the benefit of all Australians.

Capital will not wait during these long approval periods and will move to other non-Australian attractive and approved projects.  Once gone, the capital will not return and new capital will have to be sourced when times might be more difficult.  Raising money for Australian green field projects is very difficult in today’s political environment.

After wages, energy is typically the next biggest operating cost for any operating – manufacturing company, and “the cost of energy in this country is a disaster due to the ideologically driven Federal and State energy and infrastructure policies. On one hand, you have diverse and uncoordinated State energy policies trying to do one thing, and then on the other, you have conflicting climate change policies, which collectively increase costs to business and consumers “.

People think that just by creating renewables it will commercially solve the power supply problem.  However, electricity network was built on coal and gas fuelled generation in centralised locations.  The power is then distributed to consumers through high-tension power lines, which aren’t particularly well set up for dealing with intermittent and regionally distributed renewable power supplies.  One analogy is, that this situation is the equivalent to the risks of driving the wrong way down a one way street in peak traffic periods;  it is only a matter of time before there is an accident.  Clearly, policy developers either did not consider the operating and transmission needs of these new generators, or worse, simply ignored them to be fixed at a later date at significant extra cost and long term in-convenience.

The recent South Australian power catastrophe is a clear example, with the likelihood of wider “power failures” throughout South East Australia next winter and summer, due to exceptionally non-realistic and conflicting State energy policies and poor Federal energy infrastructure. You can talk about the energy policy until the “cows come home”, but it’s like saying ‘I’ve got a really good car, but won’t recognise that there is no road to drive on’, Rob illustrates.  What counts is bi-partisan action and soon.  It will still take a minimum of two years to implement a realistic solution (s), post a sensible set of government and private industry decisions.

For future progressions, Rob says “we need to adopt longer-term, more centralised bi-partisan political views with industry collaboration, in the areas of energy, water and infrastructure policies across this country.  If not, then we are going to continue the decline in our life styles that we already have, and will not achieve the future living standards that we expect.  Globally, Australia’s living standards are already in decline”.

These issues are fixable if we all work together, but circumstances will become even worse if continued divisive and polarised political dysfunction remains when Australians and democracy are the losers.  True Australian political leadership with well communicated definitive policies is needed versus the ego centric divisive political power on daily display. Political gravitas and strong leadership that builds a case for action and brings the community with them must replace divisive personal attacks for poll surges.