ANNIVERSARY SPECIAL: Via a mix of good fortune and planning, WA has positioned itself as supplier to the fast-growing economies of Asia rather than a competitor. This article is part of a special series to mark Business News' 25-year anniversary.
ANNIVERSARY SPECIAL: Via a mix of good fortune and planning, WA has positioned itself as supplier to the fast-growing economies of Asia rather than a competitor. This article is part of a special series to mark Business News' 25-year anniversary.
Western Australia’s geology has always been its economic strong point, with successive governments’ willingness to encourage mining proving a difference with other jurisdictions that’s becoming more important in a rapidly changing world.
Three commodities among the many produced in WA highlight the importance of resources and the difference they make when comparing WA with other states.
Gold, which saved WA from the worst effects of deep recessions, remains at the heart of the economy, particularly in the outback where few other industries can survive. It is also a winner at times of currency fluctuations and international uncertainty.
Iron ore has grown from a modest start on Koolan and Cockatoo islands off the Kimberley coast to become Australia’s most important (or second most, depending on the price of the day) export.
Gas, once a material rejected as a poor substitute for oil, has become the world’s premium fuel and a halfway house to a time when renewables might deliver the baseload power required by industry.
Other states have their own geological wealth but in almost every case local politicians, egged on by environmentalists, have been making it harder to mine or extract oil and gas.
The problem with shutting down all, or part, of the resources industry is that it is occurring as manufacturing contracts, in those states, forced out by international competition or high local costs, especially for electricity and gas.
Once a negative, WA’s isolation has become a positive for the state because it is not connected to the east coast power grid and has never had a big manufacturing industry, or banking sector, which is another industry in the process of contracting.
By encouraging basic industries such as mining, farming and fishing, WA has been able, perhaps by good fortune rather than planning, to position itself as supplier to the fast-growing economies of Asia rather than attempting to compete with them (and risk being crushed like the once-vibrant car and whitegoods manufacturing industries of Victoria and South Australia).
The next wave of resources development should confirm WA’s advantage, with the state already a world leader in the production of lithium, a key component in batteries. And then there’s vast space available for solar farms, although they’re the stuff of dreams at this stage.
The immediate future for the WA economy looks remarkably like the immediate past, driven by its resources sector and demand in Asia for commodities to power those nations’ industrialisation.
Gold
The first of the big three, gold could be in the first stages of a new boom, not because of a major discovery (though the Pilbara nuggets have excited speculators) but due to the potential for price surge.
Driving gold are the fears of a global currency war and a game of race to the bottom as the tariff war between China and the US morphs into a currency conflict, with both sides seeking to boost their export industries by cutting the value of their currencies.
China, perhaps not deliberately, has already achieved a currency boost as its renminbi has fallen during the tariff war to its lowest level against the US dollar since the GFC.
For Chinese investors, the temptation to load up on gold is strong, if permitted by their government, though the more important potential development is what might happen in the US after its central bank finishes the latest round of interest rate increases and gold suddenly returns to centre stage.
Last month, the Australian dollar gold price rose to within $40 of its all-time high of $1,787 an ounce (reached in mid-2016), a price aided by a high US dollar price for the metal and low Australian dollar.
At its latest price of around $1,700/oz gold is hugely profitable for most WA gold miners.
Iron ore
The star of the mining sector for the past 20 years as China emerged as a global manufacturing powerhouse, iron ore will retain top spot because the rest of Asia is playing catch-up, and that means significant growth in demand for steel in countries such as India, Vietnam, Thailand and Malaysia.
BHP Billiton, Rio Tinto and Fortescue Metals Group are all undertaking major expansion projects at the same time to replace aging mines, develop new markets and, in FMG’s case, deliver ore of a higher grade to dodge the discounts being applied to its relatively low-grade product.
Another aspect of the expansions under way is the relentless drive to automate the entire mining process from pit to port, an essential step if WA’s iron ore industry is to remain the world’s most competitive.
Gas
The fuel that nobody wanted when it was discovered off the WA coast 50 years ago, has grown to rival iron ore in terms of annual export value, and should soon snatch top spot as recently completed LNG projects reached design output.
But what comes next is the more interesting aspect of gas rather than what’s already happened, because the industry is moving quickly towards another expansion phase, driven by a rapid increase in demand for gas and improvements in engineering design that is turning once isolated and uneconomic gas deposits into viable development options.
Browse and Scarborough are the gasfields most likely to be the next LNG developments, with both projects led by Woodside Petroleum, and both representing the achievement of commercial solutions decades after discovery.
The fact that it has taken 47 years in the case of Browse to reach a development solution, and 40 years in the case of Scarborough, underlines the point about WA’s offshore gas being both remote and difficult to develop in both a technical and commercial sense.
Final investment decisions have not been taken with either gasfield but management at Woodside appears to believe that the stars have aligned through a combination of Asian gas demand and project partners reaching broad agreement on design, cost and timetable.
When, more so than if, Browse and Scarborough are developed, WA will have cemented its place as Australia’s energy powerhouse, with lithium to come.
Not everyone likes the resources sector because it does involve exploiting what’s in the ground, but in WA’s case there is no doubt it has made the state what it is, as well as funding much of the economic activity in other states – though don’t expect any thanks for that.
