THE DISTILLERY: Mining mischief

The commentariat grapples with the future of the mining boom, while one argues Nathan Tinkler could bid again for Whitehaven.

What does "mining boom” actually mean? Is the concept definable in any meaningful, measurable sense? That’s the heart of a fresh batch of commentaries this morning as Australia’s business writers really try to examine whether it has in fact ended.

Fairfax’s Adele Ferguson has a great summation. She argues that the "froth and bubble” might be gone, but the boom is still here. The columnist explains that private lenders might be hard to come by, but government-owned financing bodies called "export credit agencies” could play an increasing role.

"Export credit agencies are doing the heavy lifting on key Australian projects at a time when commodity prices have been falling and China's economy has been slowing. In other words, Asian governments are encouraging agency activity at a time when commercial banks and other lenders have started to retreat. It seems Australia is being increasingly seen as an extension of the Asian manufacturing and energy value chain. This degree of integration suggests that Australia's commodity export volumes will continue to grow with Asia, which implies the froth and bubble might have gone out of the boom, but the boom is certainly not over. The potential downside of the increased reliance on these agencies to bankroll projects is that if a strategic difference emerges with these economies they might turn off the funding tap – and then what?”

Private lender or government-related, you still need to prove a likely and reasonably sized return on investment. Expanding on thoughts expressed earlier in the week in the Herald Sun, Terry McCrann writes in The Weekend Australian that BHP simply couldn’t take a $30 billion punt on commodity prices rebounding by the time Olympic Dam started producing.

"At its simplest the ‘Big Hole’ almost defies the time value of money. No matter how much mineral was going to eventually start to flow, no matter how high the prices were – might be? – going to be, they were always so far into the future that in any analysis, they would be discounted to close enough to a present value zero. BHP chief Marius Kloppers put it slightly differently when he said if you embark on a project such as this, you risked building in a too high capital cost structure. In sum, the costs which are incurred today, grow at the cost of capital exponentially into the future – hopefully meeting at some point of reasonable return those perceived future revenue streams being discounted back. To draw an analogy, it's like two acrobats launching from different platforms. You sincerely hope the other one gets to be "there" when you arrive at that "there", having let go of your swing.”

The Australian’s economics editor David Uren delivers an extraordinary insight into the complexity of the Chinese steel sector, it’s astonishing growth into the mid-2000s and it’s potential decline – the latter being to the detriment of Australian mining exports.

"China's steel industry is highly fragmented. As a Reserve Bank paper last year explained, there are about 660 steel mills across the country – nearly all of them blast furnaces – of which the biggest 10 account for just under 50 per cent of output while the next 75 largest companies produce another 30 per cent. That leaves 575 companies producing a combined 20 per cent of China's production. Throughout the 1980s and 1990s, the steel industry grew at a fairly steady pace of about 7.5 per cent a year adding between 6 and 9 million tonnes a year to world production. But in 2001, steel output leapt 23 million tonnes, the next year 30 million tonnes and the year after that 40 million tonnes until, in 2005, production jumped 75 million tonnes. To put these numbers in perspective, China was adding the equivalent of the entire production of Japan or the US every two years. Over a decade, output rose fivefold to the point where China now accounts for half the world production.”

Fairfax’s Ian Verrender has a thinly veiled crack at The Australian when referring to "various newspapers” that claimed to have predicted the decision by BHP Billiton to stop Olympic Dam, without mentioning the cleat signals by chairman Jac Nasser from months ago.

Still on mining, The Australian’s Sarah-Jane Tasker argues that the market shouldn’t write Nathan Tinkler off from returning with another bid to take Whitehaven Coal private, but the coal baron’s dealmaking credentials have taken a hit after his biggest gamble failed to pay off.

In other company news, The Australian Financial Review’s Chanticleer columnist Tony Boyd says the headlines heralding the decline of Fairfax Media are premature because the write-down of intangible assets is not the same as a straight-up losses. Fairfax’s Tim Colebatch tracks the trajectory of the stellar career of CSL’s Brian McNamee.

Meanwhile, The Australian’s John Durie says the Future Fund has not become the buyer of last resort; it’s simply that the Australian Infrastructure Fund fits its criteria.

Fairfax’s Ross Gittins explains how the Australian tax base has sprung some big leaks and the federal budget will struggle to return to surplus. In a separate piece Gittins points out that lobbying from independent schools has ensured that extra funding for the education sector will not be allocated on a needs basis.

And finally, Fairfax’s Michael West grapples with the high cost of the Australian skiing industry.


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