An urgent productivity problem for Australia

Australia continues to be beleaguered by high labour costs and poor productivity, but a new report warns that job-shedding and mine closures won't be enough to provide miners with a route to long-term prosperity.

This week Rio Tinto’s new Australian managing director gave a speech in which he targeted labour market flexibility and regulation as impediments to improvements in national competitiveness. A Boston Consulting Group report on the ‘productivity imperative’ illustrates the urgency of the need for change.

Rio’s Phil Edmands noted that the most recent World Economic Forum Global Competitiveness Report had seen Australia drop out of the top 20 for the first time and described labour costs as a “significant challenge”. If real wages weren’t to fall, he said, productivity must be improved.

The Global Competitiveness report ranked Australia’s labour market 54th for its rigidity, 137th for its hiring and firing practices and 135th for the rigidity of wage setting. For regulatory burdens, it ranked us 128th.

Edmands said there was no way to achieve increased productivity without changes to the way labour was employed and deployed. He noted that regulations tend to evolve, expand and multiply over time and can become the “playthings’” of interest groups with agendas quite remote from the original purpose of the regulations.

The BCG report tracked the average annual total shareholder returns of 42 of the world’s largest miners from 2002 to 2013. Over the decade to 2012 the average annual TSR for the group was 16 per cent, twice that of the S&P500, but flattened out from 2009 and went backwards -- it was minus 20 per cent -- last year.

Given the steep falls in commodity prices, that’s perhaps not surprising. BCG, however, also looked at operating costs over the period. From 2002 to 2012 unit operating costs for the miners rose at a compound annual growth rate of about 11 per cent, it said. The rate of growth began to slow to 9 per cent in 2012.

BCG illustrated its findings with a comparison of the costs of surface copper mines in Australia, Chile, the US and Canada over the decade from 2002 to 2012.

Australia started the decade with mining costs per tonne of material moved of US79 cents, higher than Chile’s US69 cents and Canada’s US72 cents but lower than the US’ 87 cents.

Over the course of the decade, labour costs in Australia increased by US85 cents per tonne of material moved, mining consumables by US78 cents, services by US38 cents, diesel by US45 cents and other costs by US1 cent. Overall, mining costs increased from that US79 cents per tonne to $US3.26 per tonne.

The US, with its higher starting point, ended 2012 with mining costs of $US2.17 a tonne, with labour costs rising only US24 cents per tonne. Chile’s mining costs in 2012 were $US2.46 a tonne and Canada’s $US2.10 a tonne.

The glaring differences in the make-up of the increases in costs were in labour and consumables costs, where the inflation in Australian labour costs was about twice the average of the competitors and the rise in the cost of mining consumables was nearly three times their average.

Miners, as Edmands said in his speech, are price-takers and can’t simply pass through cost increases to customers. The BCG report highlights the extent to which the competitiveness of Australian miners deteriorated during the boom period.

The big miners are, of course, responding to improve their productivity and their cost competitiveness. Rio has dropped its capital expenditure from nearly $US18 billion in 2012 to about $US8bn this year while increasing its production volumes by 8 per cent. It has cut $US2.3bn from its cost base and expects that to reach about $US3 billion this year.

BHP Billiton’s capital expenditure has fallen from its peak of $US22bn to about $US16bn and is continuing to decline and the group has claimed “productivity gains” of $US4.9bn a year, rising to $US5.5bn this financial year, through a combination of cost reductions and volume increases.

Job-shedding and mine closures, as has been occurring in the coal industry in particular, isn’t the route to longer term prosperity. If real wages are to be protected, then there needs to be more productivity. That requires more labour market flexibility and, from unions and employers, some sense of the national imperative.

Edmands cited a list of demands in an enterprise bargaining negotiation occurring at one of Rio’s coal mines in which the unions wanted an extra seven and a half days of annual leave a year, sick leave to be accrued annually and able to be cashed out after two years or on leaving and, among other things, compassionate leave in the event of the death of “significant pets or animal, horses, cattle etc…”

Thermal coal prices are more than 35 per cent lower that they were during the boom years.

If he were a BHP or Fortescue Metals executive, he might also have referred to the Maritime Union of Australia’s threatened strike at Port Hedland which, if it goes ahead, would cost about $US100m. The employees concerned are deckhands on tugboats in the port who work 26 weeks of the year and get paid about $135,000 a year. They want an extra month’s leave and a 40 per cent pay rise over four years.

The MUA perhaps doesn’t monitor the iron ore price, which has tumbled almost 30 per cent since the start of this year.

In the global mining industry, capital is mobile and it does flow towards the highest available risk-adjusted returns.

In a commodity-price environment that is very different to that of the boom years, that capital is now being severely rationed. To continue to get a fair share of the capital still available requires a significant and quite urgent improvement in national competitiveness.