Too much of a good thing

Whichever party forms government after the March 13 state election will inherit an economy in remarkably robust health; so good and with so much cash sloshing about, in fact, that it might become a problem.

Most people do not understand what it means to have too much money. That’s an issue reserved for the super-rich. And while it might be a difficult concept, it really is possible to have too much cash, which triggers questions about how to invest it.

What annoys the rich more than anything, however, are requests from the less fortunate for a handout, whether it is from friends and relations or, most annoying of all, from people they have never met.

The solution, which defuses the issue, is to establish a charitable foundation, effectively outsourcing the problem while also providing a convenient way out of having to explain why one request is met, and another refused.

For Western Australia, which is on the verge of a period of significant economic outperformance compared with the rest of the country, a charitable foundation is not the answer; but a state savings plan might limit the call on WA’s good fortune from states potentially facing a financial crisis, such as Victoria.

Whether squirrelling away surplus cash in a WA savings plan would protect the revenue flowing today from iron ore royalties (and soon to flow from a fast-growing battery metals sector) is unknown, given the Commonwealth’s taxing powers and control over the allocation of money raised by the GST.

But it seems likely that the next state government will have to perform a skillful balancing act between managing a rich stream of mining royalties and protecting the GST deal struck the last time other states raided WA.

What caused the last attack – in the form of redirecting GST raised in WA to states that had declined to develop their own mineral endowment – was a six-year commodity supercycle between 2006 and 2012.

That was a time when WA was bursting at the seams with a red-hot property market and restaurant prices to rival anything in London or New York.

Iron ore in 2008 came close to $US200 a tonne, and despite a fall to $US62/t by mid-2009, it quickly bounced back to $US180/t thanks to demand for steel in China as it stimulated its economy after the GFC.

Copper, sometimes described as a bellwether metal because it reflects the strength of the broader global economy thanks to its widespread uses, also flew high back then, reaching a record price of $US4.50 a pound in early 2011 History never repeats, precisely, but current economic signals point to a repeat of the 2006-2012 supercycle, with China’s big post-pandemic stimulus program leading the way, followed by the US and Europe.

Other indications, including an expectation that a burst of high inflation is on the way, are compounding the effects of government stimulus spending to drive commodity prices back to where they were in the last supercycle, and almost certainly beyond.

Copper has risen rapidly to be trading around $US4.13/lb, up 92 per cent on where it was at this time last year. Nickel has also performed strongly, rising by 75 per cent to $US8.81/lb, a nine-year high.

The importance of copper and nickel is that they are metals with a dual market, a bit like gold, which is both a currency and a commodity. Copper and nickel have their long-established industrial markets and a new market as key components in the battery metals business, a sector that includes lithium, graphite, cobalt and others.

The problem with lithium and graphite is that they are not traded on an open (or terminal) market such as the London Metal Exchange, so it’s never easy to track price moves.

That’s before getting to the challenge of the multiple forms of lithium, ranging from spodumene (an ore) to lithium carbonate and lithium hydroxide, forms preferred by battery makers.

So, in order to measure the speed at which the battery metal boom is moving, there is nothing easier than tracking the prices of copper and nickel; and they are signalling a boom to rival anything seen before.

As for measuring the speed of WA’s economic renaissance as battery metals join iron ore, gold and alumina as rich revenue generators, there is an equally simple proxy in the form of BHP’s share price.

Because it has significant exposure to iron ore (WA’s biggest industry) and nickel (another WA specialty) as well as LNG via a stake in the North West Shelf project, BHP can be seen as a form of corporate equivalent of the state.

Since BHP shares hit a pandemic low of $25 in March 2020, the stock has been marching higher to be within touching distance of $50: effectively doubling in 11 months to an all-time high.

WA is not rising as fast as BHP, but it is certainly travelling on the same path, because it is being driven by the same forces found in the commodity supercycle.

In theory, and given what happened between 2006 and 2012, WA has at least three to five years of solid growth to look forward to with a corresponding impact on property, restaurant prices and wages, which are poised for an upward surge as a skilled labour shortage develops.

However, success will also bring the same problems that all rich people have: a growing line of outsiders wanting a slice of the pie, whether they’re entitled or not.

Leading the charge for a share of WA’s good fortune will be the state with the deepest problems, Victoria, which has had the worst run of COVID-19 infections but also has an economy struggling to develop industries with strong growth prospects, while frightening off industries regarded as politically incorrect.

Power mix

Energy will be another challenge for the next state government, which hopefully won’t do anything as silly as phasing out coal-fired power from Collie.

That view is not based on a belief in coal, which is very much yesterday’s fuel and one that will eventually disappear from WA’s energy mix.

It is based on what happens when you move too quickly making changes to an important section of the economy; and there are not many sections as important as a balanced and well-regulated energy portfolio.

If in doubt, consider what has just happened in Texas, which made a number of poor energy management decisions, mainly to do with regulating private sector power suppliers, with disastrous results.

In WA’s case there is currently an excellent balance of renewables (solar and wind), gas and coal. In time, it might be possible to add other power sources such as hydrogen and nuclear if/when they clear cost and safety hurdles.

But removing one of the three legs from WA’s current energy mix purely to make a political point is daft.