Australia: Solving Australia's mining productivity problem

Last Updated: 5 February 2013
Article by Bruce Adkins and Louise Bell

Warning bells about the productivity of Australia's mining industry have long been ringing, yet there's been no serious attempt at reform.

The Productivity Commission is taking a small step forward with an inquiry into the non-financial barriers to resource exploration in this country. But the scope is gravely flawed. Inexplicably, the Commission is excluding financial barriers in its investigation so it will only be looking at one side of the problem (and possibly the smaller side at that).

The Commission must expand its investigation to take account of the financial factors that influence investment decisions – costs like the Mineral Resources Rent Tax and Carbon Tax and a myriad of financial incentives, fees, charges and royalties. These are what make or break investment in resources projects and there is clear evidence these financial factors are undermining investor confidence in Australia.

Economic development in China and India in the last decade has led a surge in demand for mineral products worldwide – of which Australia has been a significant beneficiary. We are the world's leading producer of bauxite and alumina, the second largest producer of uranium, lead and zinc, the third largest producer of iron ore, nickel, manganese ores and gold and the fourth largest producer of black coal, silver and copper. 1

Australia has for many years maintained a comparative advantage in mining and resources thanks in no small part to the sovereign risk issues in emerging resource rich countries. Our stable economic and political environment, advanced technology and skilled workforce has been enough to lure investors and preserve our global market share. But this is no longer sufficient. It now costs more to extract resources here than almost anywhere else in the world. And, although Australian mining output has grown considerably, our share of world production for most mineral commodities has declined, with the largest declines for bauxite, lead, nickel, zinc and zircon. 2

Investors are now turning their attention to mining opportunities in low cost countries in Africa, Asia and South America. Reforms are urgently needed to bring down the costs of exploring for, and producing resources in this country.

Evidence of the growing concern in relation to Australia's competitive advantage is the Productivity Commission's inquiry into the non-financial barriers to resource exploration in Australia. The Commission has released an Issues Paper and is seeking submissions by 15 March 2013. The Issues Paper provides examples of such non-financial barriers including:

  • the complexity of the approvals system and delays in approvals processes;
  • overlap and inconsistency between federal and state regulatory regimes;
  • the inadequate use of performance based standards and risk based regulation to meet environmental requirements;
  • regulatory requirements that are more relevant to production being included in the exploration phase of a project; and
  • the quality, relevance and accessibility of pre-competitive geosciences.

Although the Productivity Commission will assess costs associated with government processes and broader economic costs such as costs associated with regulatory duplication, it will not examine costs related to taxation, financial incentives, fees, charges or royalties. This means that factors critical to a capital investment decision will be excluded from the Commission's investigation. For example, Queensland's introduction of a competitive cash-bidding process for exploration permits will be outside the scope of the Commission's inquiry.

Last year, Queensland's Minister for Natural Resources and Mines outlined the new exploration tender process that will be used for coal, petroleum and gas exploration. For the first time ever in Queensland, a price will be payable for the grant of coal exploration permits in areas that are highly prospective for coal, which will reflect the potential in-ground value of the resources in the area. One of the criteria against which competing applications will be judged will be the price bid by the tenderer. The Queensland Government appears to acknowledge that smaller explorers may struggle to compete on this basis and has stressed that "there will continue to be non-cash land releases in 'greenfield' and under-explored areas that promote Queensland's attractiveness to junior explorers".

Port Jackson Partners, in its report "Mining – regaining our competitive edge" found that financial factors are clearly deterring investors. The report noted that the Mineral Resources Rent Tax and the Carbon Tax have damaged investor confidence while other issues include high and rising capital costs, an adversarial industrial relations framework, labour shortages, wage costs super-inflation, project delays and exchange rate pressures. The Commission's exclusion of costs related to taxation, financial incentives, fees, charges and royalties will distort the investigation and undermine the effectiveness of any recommendations. Even if something constructive is done to reduce non-financial barriers, investors won't come if projects are not economically viable. Mining is a globally competitive game and Australia needs a tangible strategy to deal with its high cost Achilles heel.

The 2012 Energy White Paper already set out a reform roadmap aimed at non-financial barriers, including streamlining approvals of major projects, removing duplication in environmental regulation and ensuring there is sufficient supporting infrastructure and a skilled workforce. So, how will the Productivity Commission's inquiry add to what we already know? Following last year's release of the Energy White Paper, Peabody's Greg Boyce called for a national resources summit to develop a long-term plan for the resources industry. While his plea seems to have fallen on deaf ears, the idea continues to have merit. A well constructed forum with the right people from government and industry could develop a workable program of sensible reforms

If Australia is to have any chance of re-establishing its competitive edge in resources then a 180 degree shift in focus is needed – towards a long-term productivity-improvement plan for the industry and away from arguments about the disclosure of receipts from the Mineral Resources Rent Tax.

Footnotes

1 Geoscience Australia (http://www.ga.gov.au/minerals/mineral-resources/aimr.html)

2 Geoscience Australia (http://www.ga.gov.au/minerals/mineral-resources/aimr.html)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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