Australia’s mineral investment boom is running out of luck

Australia’s minerals investment boom has much life left in it yet, but thoughtful management of powerful stakeholders in both China and Australia is required.

East Asia Forum

The Australian minerals boom appears to have peaked, as commodity prices eased back after 2011 and investment has begun to taper.

Currently there are 37 mineral resource projects in Australia, worth around A$33 billion in total, which have funding committed. But there are a further 165 mineral resource projects in the publicly announced and feasibility stages, which are yet to finalise their financing. These projects are worth around A$174.5 – 202.5 billion in total.

Australia can no longer rely on its traditional luck; rather the quality of policy and openness to the best international management will determine how the mining sector will now fare going forward.

China has significant ongoing needs for mineral resources which are not available at low cost domestically. As Australia moves from the investment phase of the mineral boom to the production and export phase, there will be reduced labour costs and the Australian dollar should fall sharply. These circumstances are likely to reduce the costs of investing in Australia, especially for Chinese investors because the RMB rose 2.3 per cent against the US dollar in 2013. Indeed, as China is the largest new source of foreign direct investment globally, Chinese investment in the minerals and other sectors in Australia remains most prospective.

Yet Chinese investors have been seared by their experience in investing in Australia. The failure of the Rio Tinto-Chinalco tie-up and the massive cost over-runs of CITIC Pacific’s Sino Iron project – from around US$2.5 billion to US$8 billion – have sent a cautionary message to Chinese investors. These developments also revealed the complex connection between the economics and politics of international investment in Australia. The spill-over from these two big investment failures has been substantial. The delays and cost blow-outs associated with the CITIC Project precipitated the suspension of all Chinese magnetite investments in Western Australia as of 2011.

Meanwhile, Chinese investors are also learning the stark reality of being a first-mover in high-risk investment environments, in Africa and elsewhere. Corruption, unstable institutional frameworks and increasing anti-China sentiment have plagued projects in places like Guinea and Liberia. These marginal projects could provide a longer-term alternative to Australian minerals, but in the medium-term, few are likely to deliver a great deal.

Recent changes in Chinese corporate governance systems should in fact make Australia a more attractive investment location. China’s 2012 foreign investment guidelines demand higher degrees of due diligence and risk management on all overseas projects by major SOEs and also require that executives be held ‘accountable’ for foreign investments that result in significant losses to the state.

To capitalise on Australia’s foreign investment opportunities, and to ensure that the bad luck of the commodity price downturn is not compounded by bad policy choices, the new Australian government will need to demonstrate to potential international investors, from China and beyond, that it has learned lessons from the previous government’s failures. It needs to convince the public, as well as the coalition party room, that foreign investment is indeed welcome in Australia.

The signals from its performance in the first few months do not bode well.

When Australian Treasurer, Joe Hockey, decided to block the sale of Grain Corp grain distribution business to American company Archer Daniels Midland, he noted that the Foreign Investment Review Board (FIRB), when considering Australia’s ‘national interest’, should ‘specifically have regard to the impact the decision on this proposal would have on broader Australian support for foreign investment and the foreign investment regime into the future’.

This creates a dangerous precedent. Foreign investment is complex and stirs sentiments among a range of different domestic stakeholders. The Australian public, like that in the vast majority of countries, is reticent by nature toward foreign investment and has been since American investment became important during earlier the post-war period.

To mitigate this tendency towards national insularity over foreign investment, FIRB is charged with consulting other Australian agencies (governing tax, competition and other matters) in considering the complexity of investment proposals and providing objective advice to the Treasurer to ensure Australia’s ‘national interests’ are protected. This institutional structure was established precisely to de-politicise the foreign investment process. Treasurer Hockey’s public messages about investment undermines FIRB’s mission.

The China-Australia FTA negotiations will be the next test for the new Australian government; it will require thoughtful management of powerful and competing stakeholders in China and Australia. The Chinese will insist on increased FIRB thresholds for their private and state-owned enterprise investors. But increasing that threshold will go directly against views that were articulated by Prime Minister Abbott as opposition leader – that ‘it would rarely be in Australia’s national interest to allow a foreign government or its agencies to control an Australian business’ and that ‘the thresholds for the FIRB to assess foreign acquisitions are too high for the agricultural sector’.

If managed properly, Australia’s minerals investment boom has much life left in it yet; and given that value of trade with China is equivalent to nearly A$15,000 to every Australian household, the continuation of its growth is most clearly in Australia’s national interest.

Luke Hurst is a visiting scholar at the China Centre for Economic Research at Peking University and a PhD Candidate in economics at the Crawford School of Public Policy, The Australian National University. He recently worked within the Liberian National Investment Commission researching Chinese investment in Liberia’s iron ore sector.

This article was originally published at East Asia Forum. Reproduced with permission