Whether through good planning or good luck, Western Australia could be on the verge of a resources boom repeat as energy, old and new, takes up the running from iron ore.
A global scramble for natural gas has all but underwritten a go-ahead decision for the Scarborough gas field development and expansion of the Pluto processing hub while lithium, hydrogen and battery precursor projects head a new-energy rush.
The net result, when coupled with high prices for gold, alumina, nickel and still strong (but fading) iron ore, will ensure strength in other parts of the economy, especially property values and job creation.
If there’s a downside, and there is in every boom, shortages of capital equipment and people will add to a potentially damaging burst of inflation amid a scramble for raw materials and skilled staff, a test of the longevity of WA’s closed borders.
Signs of inflation are already to be found around the world as vast amounts of quickly created cash to stave off the worst effects of the pandemic help boost prices for everything from consumer goods to industrial machinery.
Gold, a WA staple, has returned as a useful inflation yardstick, with investors around the world hurrying to swap their depreciating government-printed money for something that’s a lot harder to find – except in parts of the world with the right geology, such as WA.
It’s the combination of old and new economic forces working to WA’s advantage, more so than any other state, which is sure to further annoy politicians in Victoria and NSW where investment in resources has not been encouraged, quite the opposite, in fact.
Jeff Currie, head of global commodities research at Goldman Sachs, a leading investment bank, has labelled what’s happening as “revenge of the old economy”.
That tag applies to raw material industries which have become unfashionable at a time of heightened interest in technology and financial investments.
It applies to the core of the WA economy with its old economy base in mining, agriculture and energy.
The shift in focus away from basic economic building blocks can be traced to decades of under-performance by those industries, with investors generating much higher (and faster) returns on technology ‘miracles’ such as Tesla, Amazon, Netflix, Google and Afterpay.
“As infrastructure aged and investment waned, so did the old economy’s ability to supply and deliver the commodities underpinning many finished goods,” Mr Currie wrote in a recent opinion column published by London’s Financial Times newspaper.
“After years of neglect today’s rising gas prices, copper supply shortfalls and China’s struggle with power generation are the old economy’s revenge.”
The effect of neglecting investment in industries, which have long-term capital requirements to generate long-term returns in favour of the get-rich-quick technology sector, is at the heart of what is also being called “the shortage economy”.
WA has never had much of a technology sector, just as it has never had much of a banking and financial services sector, which meant there were times when the state looked like an economic backwater.
Times change and the views of people like Mr Currie explain what’s happening while soaring demand for the commodities produced in WA (old and new) point to a return of boom conditions, with differences (good and bad).
The good news is that WA’s abundance of gas means there will be plenty to export into a red-hot international market.
It’s why Woodside Petroleum is expected to make a positive final investment decision on the Scarborough project in the next few weeks, and why it has recently requested increased supply from the Waitsia gas field near Dongara.
Readily available gas is a major advantage WA has over the rest of Australia, especially NSW and Victoria where gas exploration and development has been discouraged.
It explains why Woodside has the confidence to invest in an ammonia production facility at Kwinana as the first step in the production of hydrogen, an increasingly prominent new-energy fuel.
Lithium, the dominant metal in the drive to limit the use of fossil fuels, is returning as a key WA asset after a few years in the sin bin reserved for low-priced commodities.
Over the past 12 months, the lithium price has more than doubled, returning to the boom-time levels of 2018, good enough to encourage Albemarle and Mineral Resources to re-open the big Wodgina project, which opened and closed on the same day in late 2019.
Nickel, another WA specialty, is surging higher with the price hovering around $US20,000 a tonne and perhaps heading for the 2011 peak of almost $US30,000/t.
Copper, which is not yet a leading WA metal but could be if exploration success continues in the Pilbara region, is rising even faster than nickel, having cleared the $US10,000/t tonne-mark as the stockpile held at the London Metal Exchange dwindles to its lowest in almost 50 years.
Copper and nickel are particularly attractive investments because of their old economy and new economy applications, building, plumbing and steel plus electronics and batteries.
A potentially even more significant new-energy development than simply mining metals is a decision to build an $18.4 million battery cathode precursor pilot plant at Curtin University.
The plant will, in simple terms, try to create a line of value-added export products which mix locally produced lithium with local nickel, graphite and other raw materials to shift WA further up the battery production chain.
Encouraging as recent events are, with demand for ‘old’ raw materials overlapping with emerging markets for ‘new’ raw materials, there are risks, with the biggest being that WA’s economy will struggle to handle a sharp increase in demand for services and people given the existing shortages.
A second area of overlap is the role of China in the “revenge of the old” phase of what really has been a 20-year resources boom.
For much of the past two decades China was not just an importer of raw materials, it was an exporter of dis-inflation, thanks to its low-cost manufacturing sector, which pumped out goods at a significantly cheaper cost than the rest of the world – forcing down global costs and killing fears of inflation.
This time around, China is shaping as an exporter of inflation thanks to its bungled energy policies, which tried to limit the burning of fossil fuels but which have been quickly reversed when it was found the country’s economy could not function efficiently without cheap power.
China’s solution, so far, is to source fresh supplies of coal from Indonesia and LNG from the US, diligently avoiding buying from Australia though the net result is that prices have soared and Australia is being bowled over by demand from other countries.
