Efficiency gains needed in Australian economy

by Mark Benson on June 7, 2012

in Money, Business and Finance

Efficiency gains needed in Australian economy

The Business Council of Australia has released a report today entitled “pipeline or pipe dream” which reviews the cost of various projects in Australia compared to their American counterparts. There is a suggestion that projects are more expensive in Australia on the whole and there may well be issues with labour efficiencies. This would obviously be a major blow to the Australian government which has invested a significant amount of money in the natural resources industry in particular.

Project costs

One of the major concerns with regards to this report is the fact that iron ore and coal projects would appear to be around 38% more expensive in Australia compared to their counterparts in the United States of America. There was also a suggestion that oil and gas projects could be anywhere up to 200% more expensive in Australia. When you take into account that many of these projects are multibillion-dollar projects we can only guess how investors feel about the difference in overall costs.

Even though this report has obviously caught many people in the government and the natural resource sector offguard it is worth remembering that hundreds of billions of dollars of investment has already been committed to the natural resources industry in the medium to longer term. However, the suggestion that projects are far more expensive in Australia compared to the United States of America could well give entrepreneurs some flexibility to ask the government for tax breaks and other incentives.

Employment efficiencies

One of the more bizarre facts which emerged from the report is the suggestion that the Australian workforce is 35% less efficient/productive than their counterparts in the United States. This is again a major cost increase when you bear in mind the size of many of these natural resource projects. It is unclear at this moment in time exactly how this gap has emerged and indeed whether it has peaked or may have further to go.

However, if you take a step back and look at the situation from further afield we see mining jobs advertised for around AU$150,000 a year which is more than double the national average. This is a phenomenon which has occurred only recently due in the main to the lack of various skill sets throughout the domestic Australian workforce meaning that many mining companies need to look further afield and import workers. This is something which the government has been forced to concede in the short term while training programmes are put in place to ensure that the domestic workforce can at least fill more of the skills gap in the future.

Investment risk

Whatever size of project and wherever these projects may be investors will need to take into account the investment risk and the potential profitability. If the cost of creating for example a new mine in Australia continues to grow and there was further pressure on employment availability then this would reduce the return on investment and increase the investment risk. It is also worth remembering that the mining companies are still at the beck and call of the commodities markets which dictate the price of iron ore, coal, oil and gas.

A separate report also suggests that the amount of capital required per metric ton of output has risen by around 25% annually since 2007. In for example the Australian thermal coal sector this equates to $141 a ton which compares very unfavourably with South Africa at $99 a ton and Indonesia at $56 a ton. The very fact there are major resources across Australia has supported the sector and will continue to do so in the short to medium term but in the longer term there is no doubt that various cost anomalies will need to be addressed otherwise investors may well start looking towards other areas of the world where the risk reward ratio is low and the capital intensity is less.

Will the government bow down to the natural resources companies?

Over the last few months we have seen the Australian government introduce a number of taxes specifically aimed at the natural resources industry which is making a significant return on investment. However, if this report is backed up by cold hard facts, as it appears to be, then the various natural resource entrepreneurs across Australia will finally have ammunition which they can use against the Australian authorities.

Many people in the business arena believe this is payback time for the ongoing smash and grab policy which the government has used on numerous occasions over the last few months. In many ways this has been used to fill various black holes in the federal budget ahead of the expected budget surplus in 2013. Whether the government would be forced to give back, via tax breaks and other initiatives, a significant portion of this additional income remains to be seen.

Employment market

The very fact that the mining industry in particular employs a large number of Australians is also another plus point for the natural resource entrepreneurs. They can threaten to withdraw various investments in the years to come and indeed we have seen a number of mines closed down because of inefficiencies and a less than expected return on investment. This could very well degenerate into a game of high-stakes poker with the first person to blink losing the lot.

At this moment in time there are skills shortages across the natural resources industry and with unemployment at just 4.9% the situation we may see a further squeeze on wages in the short to medium term. However, if the government is able to invest in various training programmes in the short to medium term this should help to alleviate some of the pressure.

Conclusion

The report released today will obviously be a bitter blow to the Australian government amid suggestions that the country is falling well behind the likes of the United States of America with regards to the cost of projects and cost of employment. The government will need to react to this challenging environment and indeed a number of the additional taxes aimed at the natural resources industry may well need to be reinvested in the short to medium term under the guise of tax breaks and initiatives.

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