Does no one understand the mining industry?

Jac Nasser today made a pretty simple and fundamental point about the mining industry that appears to have been lost amidst the euphoria of the resources boom of the past decade. The industry is cyclical.

Speaking at a function sponsored by The Australian Financial Review and Deutsche Bank in Melbourne today, BHP Billiton's chairman said that "someone" doesn't understand the cyclicality of mining. For "someone" you could substitute Wayne Swan, or Campbell Newman, or the Greens, or a large part of a community that thinks the boom is a windfall that has to be socialised.

Booms come and go and this one is going. The mature part of the industry understands that and invests over 30, 40, 50-year time horizons on the basis that the good times will be good – but likely to be the aberration rather than the norm.

As Nasser said, "they" (read governments) "want to take the upside and want someone else to take the downside". In effect, governments in this community in recent times have adopted a "tails I win, heads you lose" approach to the sector.

It doesn't work like that. If you deny the industry the benefit of the good years to offset the inevitable bad eras you flatten the prospective returns in an industry that has a high risk/reward equation. It is an industry dominated by global companies with global options and where capital is therefore highly mobile and which will flow towards the opportunities with the best risk-adjusted returns.

What Australia had going for it, before the RSPT, the MRRT, the carbon tax and the opportunistic attempt by state governments to exploit the compromised MRRT and Swan's commitment to the miners to offset state royalties against MRRT liabilities, was relative stability and certainty. Nasser, quite deliberately, referred to the "good policy" era of Howard and Keating. He didn't need to name those he believed responsible for poor policy.

Australia was, until relatively recently, a pro-mining jurisdiction with a relatively stable taxing environment because for much of our history governments had recognised that our natural resources endowment was a major source of competitive advantage.

Somehow, somewhere in the past half-decade the greed and need and opportunism of cash-strapped governments with an obsession (worthy or otherwise) with balanced budgets has forgotten that the sector invests with time horizons of decades rather than fiscal years and with an understanding that there will be as many, if not more, bad years as there are good.

As Nasser said, it isn't a question of governments never changing policy but rather one of governments recognising the cyclicality of the industry, the timeframes for investment, the scale of investments and risk, the mobility of capital and ultimately that the national interest revolves around a partnership between the miners and governments – it is in both their interests for the industry to do well.

"Governments, particularly around the resources industry, have decided well, this is going to go on forever and their (the miners') behaviour isn't going to change based on what we do therefore this is a great opportunity for us to get some more revenue and spend it somewhere else," Nasser said.

The reality is that the boom won't go on forever, indeed the best of it is already behind us, but the spending governments have locked in – particularly the Gillard government's commitments to spending of MRRT revenues that won't be raised – are going to create significant fiscal management challenges in future.

The Queensland government's decision to raise royalty rates on coal in this week's budget was, Nasser said, "unbelievable". As he said, coal prices have fallen dramatically but labour and capital expenditure costs have soared and are among the highest, if not the highest in the world.

Many Queensland coal mines, he said, would be cash flow-negative today but because royalties are triggered by prices rather than margins – they take no account of what has happened to costs – those miners now face an extra destabilising impost. In the absence of an early rebound in prices it won't just be new mines that are mothballed but, like BHP Billiton's Gregory and Norwich Park mines, existing mines that cease production.

Campbell Newman may blame the companies for "allowing their costs to get out of control" but much of the cost escalation was beyond their control.

The very nature of the industry means that when prices rise there is, as Nasser said, a scramble to invest and generate production and cash flow as quickly as possible before the cycle ends. That means competition for skilled employees and capital equipment that drives costs up.

The miners aren't to blame for the overlays of increased industrial muscle afforded the unions by the Fair Work Act, or under investment in infrastructure and consequent bottlenecks, or the strength of the dollar, or the exponential increase in regulation and its costs, or the carbon tax or increased government taxes and charges.

For miners, in Nasser's language "no change is a good change". There's been a lot of change in the framework within which the industry operates in recent years and not much of it conducive to ensuring that within the post-boom phase the industry is now entering that its employment and wealth-generating potential is maximised.

In Queensland, with many coal miners facing the cash-negative outlook that Nasser referred to and therefore little prospect that they will pay the MRRT and therefore be able to offset their royalty payments against it the Newman government has shown, like the Rudd and Gillard governments before it, that it has an unsophisticated understanding of the sector, how it operates and the options it has to deploy capital.

The resources industry is, as Nasser said, a cyclical industry operating within a cyclical global economy (which is now experiencing a severe down-cycle).

China's economic miracle, which ignited and sustained the boom, will probably continue but at a far more subdued pace and evolve in character and, as we've seen in the past year, will have its own cycles.

The lengthy period when the demand for commodities was significantly ahead of supply and which produced extraordinary spikes in prices appears to have ended even as the supply-side is bringing massive levels of new supply into the market.

The game has changed, dramatically, but governments, and others, appear slow to appreciate it or its implications for what have, over a decade, become reference points that have been taken for granted by a generation without much, if any, direct memory of resources booms and busts or how and why the structure of the industry has been changed/made more vulnerable by the nature of this past decade.