BHP director says Australia wasted boom

From The Australian comes a moment that shows that if you live long enough you will see everything. Malcolm Broomhead, director at BHP since April this year today says:

“We’ve ended up with the highest cost structure, albeit with the highest standard of living in the world, making it twice as expensive to stevedore a ship here as it is in New Zealand. And we’ve blown a great opportunity to set up sovereign wealth funds…The big shareholders these days, they’re sovereign wealth funds in Norway, Kuwait, United Arab Emirates and Singapore — they’ve used their resources.

We can still set that up, but we need to cut our cost structure to be able to fund it, rather than just taking it from the boom. It’s something we’ve got to do because we’ve got this demographic tsunami coming towards us and we can’t bury our heads in the sand and say it’s not happening…We’ve got to fund problem or we won’t be able to compete in Asia; we’ve got to solve our cost of living issues.”

True enough. But to do it we really needed a huge resource rent tax as well, like Norway’s, and we might have come out of the boom with an SWF of $3oo billion, a lower dollar, house prices and wages 20% lower and a budget liberated from the constraints of bank guarantees.

We’d still face an adjustment but it would have been a lot easier and quicker.

But coming from a BHP director – the same firm that was central to the destruction of a government that tried to create a resource rent tax, part of which was aimed at keeping the non-resource economy competitive – it’s a bit rich.

Houses and Holes
Latest posts by Houses and Holes (see all)

Comments

  1. Sure, but we were smarter than those silly Norwegians. Instead of creating a SWF that invested in a diverse portfolio across the globe, we invested everything in the world’s best asset class: Aussie real estate.

    • Those Norwegians were big in sub-prime too… and took enormous losses. So don’t give them too much credit. Their investment returns have been modest at best.

      H&H directly contradicts himself (left leaning prejudices); firstly, there is no sovereign wealth fund for mineral rich countries – simply because minerals are typically not critical (unlike O&G) country resource duplication globally (i.e. for new investment you have to reply on others to impose similar taxes) and prices are extremely volatile. Moreover, long-term returns are extremely uncertain – as you will see when literally hundreds of small mining companies delist. Remember that CAPM returns for the mineral sector were -10% per decade for several decades leading up to the 2002 China boom. H&H’s comments about what is coming up for Australian economy suggests dire consequences as a result of a China crash (and rightly so) that could run for a decade or more. But lets be honest, very little super tax was collected, an zero would be collected for decades to come…

      And the biggest kicker is about to arrive in spades – because government receipts from recent investment boom suggests (at least to me) that BHP and Rio may not even pay much corporation tax for the next coming decade due to enormous A&D, and interest repayments. So I could someone explain how you can collect super profit tax and yet not get any corporate tax?

      Its an irrational argument. You cannot have it both ways – you cannot say that mining is about to experience an major commodity crash with historical parallels – and yet in the same breath suggest we could tax the sucks and create and enormous sovereign wealth fund!!!!

      It may play well on the Labour left and the Greens – but not on a business site where hopefully) there is more informed discussion. Such arguments will result in an irrelevance…

      • Yeah if only reality didn’t make a mockery of everything you just wrote Research you might have a leg to stand on.

        De Beers proves you can get a minerals monopoly going.

        Centuries of gold standard proves you can use minerals as a sovereign wealth fund.

        Tell me Research, how valuable was having billions of barrels of oil underground 100 years ago? How about having lots of gold deposits? Hmmmmm

      • You cannot have it both ways…

        What he’s saying is we should have introduced a super profits tax (and created a SWF) during the boom, and indeed Mr Holes was tirelessly advocating for these things at the time. Its all too late now.

        It may play well on the Labour left and the Greens – but not on a business site

        Oh, you mean like the quality commentary you get from the likes of Gotti over at BS?

      • Miguel – Diamonds are not normal commodities. They are in fact something entirely different, for instance and the Premier Mine which produces several million carats per annum, has 20 stones that make up half of their revenues. Moreover, demand increasingly dominated by rising middle classes in both China and India (supplemented by the Gulf States), which combined will match the US market by 2017 if current trends remain in place. On the supply side constrained with less than 30 significant mines in production, with many of those moving to underground which will increase costs. But more importantly, there has been a dearth of significant diamondiferous kimberlite discoveries.

        Iron ore however is iron ore, just Fe, its everywhere – unlike diamonds. And many West African deposits are in fact better quality than many Australian deposits which have declined over the decades. There is no similar basis for comparison…

        Lorax – I understand the implication that one has to differentiate oneself. That if in the market place, you cannot replicate your competitor because its just duplicates and adds little. Furthermore this website adds so much more. H&H has had an amazing run on a large number of topics – and has been brave enough to “put pen to paper”. I listened to Kolhers recently in a video interview on IO, effectively mouthing what all the Sell Side analysts were suggesting, consequently he has been totally and utterly wrong, effectively suggesting BHP and Rio were really good value. And prices would stabilise and go upwards. It attacks house prices and correctly identified causes that no one else got, etc, etc.

        The reason why this website is so enlightening is that there is a wealth of free thought. Unfettered by prejudice and group thinking.

        However, that is something you have to work at – and always maintain. I have seen much grouping thinking among participants and even certain contributors. Its something you have to be actively aware of. We all like others that are similar to ourselves – after all, we are inherently tribal…

      • H&H has had an amazing run on a large number of topics…

        Its a much longer run than you might realise, and I have been following his posts since he was a contributor at BS.

        Here’s one I picked out randomly:
        http://housesandholes.blogspot.com.au/2010/12/up-against-it.html

        I have seen much grouping thinking among participants and even certain contributors.

        Sure, there are several camps here, and its hard to run against the mob, especially the housing crashniks. But most views are tolerated which is good, although I think the MB moderators should draw the line at racism and paid astroturfers.

      • Mig – not sure what you mean FeO? Fe2O3 is hematite, which is what most of the mines run on. Not sure – probably not important? Diamonds are rare and special… and some argue we have effectively discovered virtually all the natural sources that are to be realistically found…

        Lorax – don’t disagree with anything you say… and I guess certain websites will always attract a certain type of follower. I assume that last reference was toward 3D – and I must admit, some of his comments defy reality… but I fear that if you got rid of him and others (including me? Many would be happy) then this would be a pretty boring website (H&H aside)!

      • ? Fe2O3 is hematite,

        What’s your point? It’s a mineral just like diamond. Are you saying O&G are rare like diamonds?

      • 97% of our transportation industry relies on oil, in some form or another. Whether that be cars, planes, shipping, etc. That figure is identical to that of four decades ago… so yes I am saying oil is different that minerals extraction. But I never said anything relating O&G to diamonds…

        Diamonds is like art, or property in Mayfair, or expensive French wine – a market unto its own. If you had the money – and didn’t want to burn coal, you could have a very hot fire burning diamonds if you so desire!

      • . But I never said anything relating O&G to diamonds…

        You didn’t but you said one cannot set up a SWF from minerals, then I mentioned diamonds, and you said they’re rare — not like IO.

        So is O&G rare like diamonds? Or can one in fact set up a SWF based on mineral wealth?

      • Only if you are Botswana… even then its an industry, not a SWF. BEE in SA has been a disaster, but that wasn’t a SWF, it was black investors paying market rates. Which has bombed as the industry bombed…

        There is no free lunch minerals industry. It is a brutal horse to hop upon. Which all will be reminded soon enough. IMHO, you will see literally hundreds of junior companies delist in the next several years. Those debt laden in WA will see their whole lives vanish in front of them… years of work disappear in a flash.

        Thinking you can tax an industry as brutal as the minerals industry is pie in the sky stuff. Why? because there will be nothing but debts and dreams to collect… good luck with that! And the great irony is it has always been like that…

      • but I fear that if you got rid of him (3d1K) and others (including me? Many would be happy) then this would be a pretty boring website (H&H aside)!

        Personally I think this is the biggest problem facing this web site, if you try to “manage” opinion diversity you indirectly foster group-think and undermine the value in the greatest asset of the web site (opinions).
        Sometimes 3D makes complete sense, sometimes nonsense, sometimes its astroturf and sometimes he’s humorous…making his opinions, definitely worth reading. Frankly with the bashing he takes here I’m surprised he still bothers to turn up, I know you’re all convinced that he turns up because he’s paid to, personally I dont believe that’s his primary motivation because his opinions often include a good deal of industry insight….you never get that sort of insight from a paid talking head, they’re all about fluffy meaningless words and upbeat messages even when the sky is falling.

      • There is no free lunch minerals industry. It is a brutal horse to hop upon. Which all will be reminded soon enough.

        Seen the price of oil or LNG lately?

      • Many of us take a regular bashing and we keep coming back — you included. What’s your point?

      • I know, I know… don’t depress me. I can only stand a small amount of bad news lately. Only because I don’t think people realise what is around the corner.

        Lorax – I have never implied that about 3D being paid. Although sometimes he does annoy with his optimism – or he is trying to annoy. Agree about other points. Heck – I even like your posts (some more than others…). But that is the real benefit of this website.

        Sorry have to go. Getting too depressed, although Miguel seems completely immune to it all – might say it even excites him…

  2. It is not rich, it is smart. Start rewriting history now, before the rabble reach for the pitchforks and torches.

  3. Broomhead is trying to rewrite history but in a subtle way. The comment “we’ve ended up with the highest cost structure” is key.

    Wages ballooned during the mining boom because, hey, supply and demand. BHP and RIO were making huge margins so there was hardly any need to keep a lid on wages costs.

    And you could argue “so what”. If ridiculous profits are to be made some of it may as well flow to the workers as well as the shareholders.

    Of course if we’d had a resources tax that would have put a bit of downward pressure on the ridiculous profits and the ridiculous salaries. It also may have caused companies to think about overinvesting. But BHP doesn’t want to admit they’re part of the problem, they’re trying to shift the blame onto the “cost structure”. And the resources tax would have helped deal with that “demographic tsunami” too but no matter.

    This is just an angle for a future push-down in wages, you can probably expect BHP and RIO to push for more 457s in the near future as a way of dealing with that “cost structure” problem.

    The real story, which no-one much talks about nowadays, was the treasonous selling out of BHP and its superior Australian assets to Billiton and its inferior African assets. Just look at where the profits have come from since the merger. All we did was subsidise the retirement of Apartheid-era South Africans.

    • Just add BHP to the list, MIM and just about every australian productive co.

      Squandered is not the right word, there is a string of invective and despair that might catch something of the mess that we have been left with after the Laberal parties and australian people have traded our children’s future.

    • ‘This is just an angle for a future push-down in wages, you can probably expect BHP and RIO to push for more 457s in the near future as a way of dealing with that “cost structure” problem.’

      Bingo. All for the good of the country of course….

  4. The mining industry campaigned against a SWF. 3d said it would be useless because we have a CAD – completely confusing cause and effect. How times change.

  5. “budget liberated from the constraints of bank guarantees.”

    Why do you insist for abolishing the banks deposit guarantee? Are you aware that this will hurt the most and again the young generation saving for ultra expensive home to buy? Obviously you are not a saver and all those crocodile tears about the young generation of FHB are just crocodile tears. Obviously if one is coming from FIRE sector one always will be one of them – reckless and careless about the people who do not own a house in Sydney or Melbourne.

      • H&H, having in mind our politicians, you should always be very specific, because if they read MB, they can take what ever is the easiest for them to do regardless of the pain imposed to the least having. Our young people are and will be the least having for the decades to come and they try to save in an environment where everything is going up, but the wages will be down. This guarantee is their only hope that they can safe for a home in a low risk place. Buying a house today is a high enough risk of itself. The guarantee isn’t for the millionaires, it is for the young middle class working people.

    • Are you aware that this will hurt the most and again the young generation saving for ultra expensive home to buy?

      Your assuming that they will stay ultra expensive….charge the correct risk premiums and the housing market will start correcting itself.

  6. As much as I personally believe in SWF’s I feel that an Aussie SWF would be a complete disaster, the underlying problem is that our Politicians have unbelievably sticky fingers and this SWF would in short order become the worlds greatest Honey-Trap. Even if the money in the fund went untouched our Aussie finance industries would find ways to assign incredible fees for churn to what’s basically a long term buy’n’hold strategy. Look no further then the Super industry for an example of how it’d be run. Heck even the proposed “medical research fund” can’t use the dollars flowing directly from prescription / doctor visits NO they have to use only a small percentage of the profits resulting from a “properly invested” endowment fund. What can one say except its our Politicians repaying their masters.
    IMHO If Australia wants to make a real long term investment with real Aussie Value, it needs a plan to create a smart Australia..and I mean a real plan with real objectives and real funding.
    Education is the only honest way to invest in a countries future!

    • +many. Unfortunately I don’t see it happening. The pain required to get to that position will be too much for many to bear.

    • Education is the only honest way to invest in a countries future!

      And its much easier when you have the funds.

      An Aussie SWF should really be invested in Aussie RE — what could go wrong?

    • That’s the only drawback.
      Most SWF’s across the world seem to have performed fairly well though.

  7. Clearly Malcolm’s key thrust is the question of cost structures particularly more broadly (logistics, ports, red/green tape).

    We have become an expensive place to do business. If we don’t address this from within, over time global markets will do it for us.

    Everyone likes the ‘idea’ of a SWF – an idea easier said than done in Australia’s case – chronic CAD, sticky fingers of politicians, etc.

    He made no reference to mining super taxes – a terrible idea that has had its day. Over the weekend I see Andrew Leigh reconfirmed Labor had no intent to pursue or resurrect this flawed policy again. Done, dusted, over and out!

    • The spin begins …

      Everyone likes the ‘idea’ of a SWF – an idea easier said than done in Australia’s case – chronic CAD, sticky fingers of politicians, etc.

      He made no reference to mining super taxes

      And we’ve blown a great opportunity to set up sovereign wealth funds

      As you like to point out often, the wealth of Australia is in mining and minerals…the notion of a mining super tax is implicit when calling for the set up for a sovereign wealth fund.

      • He said not a word! SWFs are like babies, puppies and little ducklings – everyone likes them. Let’s get our budget in surplus, paydown foreign debt and then have another look at establishing a SWF.

    • There’s that paid astroturfing we’ve all been waiting for. Why don’t you tell us what Santamaria thought of the pricing structure?

  8. On the topic of demographics,

    ‘…an obvious solution: Relatively underpopulated and highly developed countries could profitably take in young Africans and South Asians — and both sides would gain. Yet it’s far from clear that all nations that could benefit from this policy would entertain it, partly because of persistent racial and cultural bias. There is also the legitimate question of how quickly immigrants can adjust to new environments, especially if they are arriving with weak educational backgrounds as the job market demands ever-stronger skills. ‘

    http://marginalrevolution.com/marginalrevolution/2014/11/the-economics-of-population-imbalance.html

  9. Royalties are payable to the states on account of that thing called the Constitution. Whatever the merits of a RRT, the reality of these things being a state matter is unavoidable.