THE DISTILLERY: BHP's blinder

Let's call it the September 11 effect. The state of panic that overtakes reason after a traumatic event. Every Muslim is suddenly a terrorist. Every accident an attack. All other threats forgotten.

Something similar dominates today's commentary of BHP Billiton's announcement yesterday that it is under investigation by the US Securities and Exchange Commission for possible breaches of anti-corruption laws. 

Malcolm Maiden of The Age, John Durie and Matthew Stevens of The Australian, Ian Verrender of The Sydney Morning Herald, Karen Maley of Business Spectator and Alan Durie of The Australian Financial Review all cover the development, ruminating darkly on its implications.

First the facts, according to consensus. Some money has gone missing in Cambodia, perhaps $3.5 million, or a portion of it. For the best detail of how much and to where this column recommends Matthew Stevens, who, as we know, has the closest relationship with BHP. The money is linked to securing mining rights. According to Ian Verrender, a second project in The Philippines is under investigation. Both projects are shelved. The investigation has been underway since August last year.

Now to the commentary. Most condemn BHP for failing to reveal the details until now. But, this column must ask, why would they? Although such breaches are a serious matter, they are not material. Any fine or fallout is likely to be infinitesimal relative to BHP's bottom line. Except, of course, if we take into account the September 11 effect, which may have actually blown the issue into something more problematic than it is. Imagine the panic had BHP confessed in August on the heels of the Stern Hu arrest. 

What of the second universal opinion, that the revelation could not come at a worse time for the Big Australian as it lobbies European regulators for the Pilbara JV? If the first point doesn't answer that for you then a few questions make the point. Is the SEC in Europe? No. Are Cambodia and The Philippines in Europe? No. Do the SEC and European competition regulators police the same territory? No. Are European regulators going to base their judgement of the JV upon some bad PR for the miners? No. Does the investigation relate to the marketing of minerals or their supply in any way? No. Does it relate to China or other iron ore customers? No. Does it relate to iron ore in any way? No. Pretty much the only connection this column can find between the SEC investigation and the Pilbara JV is that they share a few vowels.

Just how commentary can work itself into high dudgeon over this relative trivia, whilst comprehensively ignoring the fundament rewiring of iron ore markets that BHP is engaged in is beyond this column. How about asking a few pointed questions about why BHP did not see that its two major strategies – pushing customers onto short-term contracts and merging up-stream iron-ore operations with Rio – were in contradiction with one another because spot pricing is about supply? Why did BHP not learn from its 2008 experience, that global regulatory bodies will push back against gouging in iron ore markets? How much will a failed merger cost shareholders? What are the implications for competition policy given this repeated monopolistic behaviour? What are the implications for the nation of this abuse of market principles? And the shift in Australia's Asian relationships? Where do the interests of BHP shareholders and Australian citizens diverge? Why is the government allowing the iron ore majors to determine foreign policy? What are the implications for the economy of the now much more volatile iron ore price? What role will derivatives play in what will be suddenly the second largest spot market in the world behind oil? What will Goldman Sachs do to iron ore? 

Commentary is comprehensively failing the nation on one of the most important political economy issues we face.

God knows why, because slaying sacred cows is less painful than it appears – a point made today in an interesting op-ed by John Daley of The Grattan Institute in the AFR (Alan Kohler of Business Spectator also offers a summary of the report). In one of the institute's first major studies, Daley writes that "...industry by industry analysis shows” it unlikely that factories will move offshore as a result of any Carbon Pollution Reduction Scheme.

The report therefore concludes that "...the 'free' permit regime both wastes $20 billion and delays adapting Australia's economy to a carbon-constrained future.” According to Daley, "...alumina refining ... LNG production and coal mining will all remain attractive even if they pay a carbon price of $35 per tonne of CO2”. High methane coal mines are likely to be replaced by low methane versions. Daley acknowledges that some industries would shift, particularly "aluminium refining” and proposes that a much better use of "... 160,000 per job per year” it will cost to keep the industry through the free permits would be much better spent helping the communities affected by their departure to adjust. The report was researched by Daley, a former McKinsey consultant and MD of Etrade Australia and Tristan Edis, former Policy and Research Manager. Australian Business Council for Sustainable Energy. Sadly, this column will add, given the political cycle, this report is destined to flog a dead horse rather than slay any sacred cows.

That is because it seems Rudd's attempt to steer the federal election onto the safer Labor territory of health has succeeded admirably. And no wonder, following Tony Abbott's disastrous performance in the debate. Michael Stutchbury of The Australian obliges with a bitter summary of Rudd's achievement at COAG. "The feds will finance 60 per cent of the so-called nationally-efficient price of activity-based hospital services, also known as case-mix funding. This is designed to deliver more efficiencies than "block" funding, which continues for smaller country hospitals. But bureaucratically setting efficient prices for hundreds and even thousands of different hospital services will be a daunting task for the new Independent Hospital Pricing Authority.” 

Perhaps, this column will counter, but as Alan Mitchell of the AFR has pointed out, efficiencies were achieved in Victoria using the same funding model. Nonetheless, Stutchbury makes a valid point in pointing to the bureaucratic congestion resulting from compromises that got the deal over the line. "But the states also retain management control over their hospital systems. They will strike service agreements with the local networks, manage them on a statewide-basis and retain industrial relations responsibility ... But they also will be scrutinised by a new federal-state National Performance Authority, which will secretly warn the feds and states if individual local hospital networks are lagging ... The local hospital networks also will be required to coordinate with new federally-funded community-based primary healthcare organisations ... Maybe this bureaucratic alphabet soup will be healthier.”

Finally today, for anyone interested in the stability of the financial system, this column recommends reading Stephen Bartholomeusz's excellent piece on converging growth strategies for banks, in the wake of the ACCC decision on NAB.