There’s no doubt Western Australia has been a winner from globalisation, but the good times may be set to change as the headwinds of ‘slowbalisation’ gather strength.
In its simplest form, globalisation is all about free-flowing trade between countries, which links producers of raw materials (such as WA) with customers around the world, especially Asia.
Slowbalisation is the opposite: disconnection and retreat behind sovereign borders with all the inefficiencies and higher costs that follow.
Europe is the best example of what happens when trade routes are severed, with the region lurching towards a severe recession as it tries to ban the purchase of Russian oil and gas, despite that material being the cheapest and most readily available.
The US is also feeling the slowdown (and inflationary) effects of limiting trade with China, which is the source of its cheapest manufactured goods.
These items are being replaced by more expensive US products. Most of the trade changes, which threaten a slowdown in global growth, have nothing to do with economics. They’re entirely political, but that doesn’t make the damage any less severe, especially at a time when other, equally bruising changes are occurring.
‘Greenflation’ is another of the headwinds starting to gather pace. As the name implies, it is inflation caused by a shift from traditional (mainly fossil fuel) sources of energy and their replacement with more expensive renewable energy.
In time, renewable energy might be competitive because the power source is cheap (sun and wind) but for at least the next decade it will require massive capital investment, which adds to inflationary pressure.
Just how much money will be required to pay for the energy transition away from coal, oil and gas to a future powered by renewables is staggering, with one estimate being $US50 trillion over the next 30 years.
That whopping number was used last month by Benedikt Sobotka, chief executive of Eurasian Resources Group, at a forum in Switzerland to highlight his claim that the rush for green resources would do more than drive inflation higher: it would spark a return of the commodities super-cycle.
For WA, the view of Mr Sobotka, who runs a company producing copper, cobalt and aluminium, is a clue to how the state could dodge the worst effects of slowbalisation and greenflation.
Costs will undoubtedly rise, and consumers will feel pain at the bowser when buying a tank of fuel (as well as in their monthly mortgage payments as interest rates rise), but those negatives should be offset by continued, if not accelerated demand for WA’s exports of minerals, metals, food, and fibre.
Mr Sobotka’s view of the super-cycle returning even as war rages in Ukraine was supported by other delegates at the Swiss conference, with warnings that the switch from globalisation to slowbalisation would force manufacturing industries in Asia and Europe to stockpile strategic raw materials to avoid trade flow disruptions of the sort seen during the COVID pandemic.
“Anything between $US200 billion and $US300 billion in investment per year will be required for the mining industry to satisfy demand for the energy transition,” Mr Sobotka said.
With its world-class resources endowment and mining-friendly regulations, WA should be a major beneficiary of that investment flood, even as other regions suffer from inflation associated with the end of globalisation.
Critical profit move
Finding a spare $US200 billion (or more) each year for new mines producing strategic metals will not be easy, but a novel solution has been proposed by leading resources research house Wood Mackenzie.
The British-based consultancy reckons there’s an opportunity for oil companies to redirect their windfall profits from near-record prices for oil and gas into critical metals.
Past attempts by oil companies to operate mines (or for miners to produce oil) have rarely succeeded, with BHP an outlier. But even it caved to investor pressure, hand-balling its oil division to Perth-based Woodside Energy.
This time it might be different because energy metals are essentially in the same market as oil and gas, with the enormous difference that governments are forcing the phasing out of fossil fuels while encouraging the use of renewables and battery storage of electricity.
A marriage of mining and oil will require a significant shift in investor sentiment and a change in government policies.
As Wood Mackenzie noted, investors are getting a far better return from producing oil than they could expect from metal. And governments, while claiming to be keen to see more mining of strategic metals, continue to erect barriers to development.
