China’s not the only game in town, as recent moves in the resources sector demonstrate.
China’s one-sided trade war with Australia is looking more like an own goal every day, as the rest of the world fills the void left by the withdrawing bully.
But that’s just one of the lessons for business owners from what initially appear to be a number of disconnected events.
A second lesson can be found in Rio Tinto’s recruitment of former WA Treasurer Ben Wyatt as a director, while a third lies in the potentially ill-fated stampede by a number of small Western Australian companies into the tightly controlled world of potash.
China first, because a widely held view is that Australia cannot win a fight, albeit a trade fight, with a country that controls the world’s second biggest economy.
However, that pessimistic view misses the point about what’s happening elsewhere and how a relatively small, free-trading country like Australia can successfully do business with the rest of the world.
During the past few months, China’s so-called wolf warrior diplomats have been howling at Australia and any other country that dares question China’s right to rip up the book of trade rules.
In response, the rest of the world has been lining up behind Australia, and not just with words of support.
Job-and-wealth-creating deals, which might once have been led by Chinese investment, are being replaced by long-term and less disagreeable trade partners.
Perhaps the most surprising was the purchase earlier this month of an abandoned iron ore mine in the Northern Territory by a Vietnamese steel maker, Hoa Phat Group.
Restarting the Roper Valley mine will not be easy. It has previously been the source of low-grade ore and has struggled to operate profitably under different owners.
Hoa Phat, however, has not necessarily bought Roper Valley to generate a local profit. It is more interested in buying into the Australian resources industry to supply its burgeoning steel business, which is a key part of Vietnam’s industrial revolution.
The Vietnamese company is also on the hunt for Australian coking coal mines of the sort being sold by BHP because of pressure from activist fund managers.
Vietnam is not China, in many ways. It is obviously smaller, but has a sizeable population approaching 100 million and, like Australia, it has a prickly relationship with China.
While impossible to prove, it is significant that a Vietnamese company has dropped into the Australian resources sector as Chinese investors are ordered home by their government.
Several other deals are almost as interesting as the arrival of Hoa Phat.
• The purchase of a 30 per cent stake by Posco of South Korea in the Ravensthorpe nickel mine. Posco is not a newcomer to WA but its $US240 million investment in nickel is a big move by a non-Chinese company into battery metals.
• The investment by Chile’s lithium leader, SQM, in the Mt Holland lithium project in joint venture with local industrial leader, Wesfarmers.
• Ongoing expansion by Albemarle Corporation of the US in WA’s lithium industry.
• Formosa Plastics Group, Taiwan’s biggest private company, acquiring a 31 per cent stake in the Iron Bridge iron ore processing project led by Fortescue Metals Group in the Pilbara, with Formosa earmarking its share of production for a steel mill in Vietnam.
It would be better for Australia to have China as a trustworthy and rule-abiding trading partner, but what’s happening in multiple industries is proof that Australia, with its high-quality raw-material (and value-added) exports can replace China and do business with the rest of the world, just as Britain is doing after the trauma of Brexit.
Rio reality check
If Australia’s ongoing experience with China is a case study of why a business should never rely too heavily on a single customer, then Ben Wyatt’s appointment to the board of Rio Tinto is a lesson in the foolishness of being an absentee landlord.
The focus of comments about Mr Wyatt and Rio Tinto has been on his status as an Aboriginal Australian. And while that’s important, it’s more significant to see him as Western Australian eyes and ears at the board table of a company that forgets where the lion’s share of its profits originate.
Before Mr Wyatt joined Rio, the company did not have a WA-based director in a state that represents 80 per cent of its net present value thanks to sky-high iron ore prices.
It’s not known whether the fallout over Rio Tinto’s demolition of an Aboriginal heritage site at Juukan Gorge could have been avoided if Mr Wyatt, or another WA resident, had been on the company board. But it is possible that other board members would have been alerted more quickly to the depth of the problem.
Not having a WA-based director was an astonishing oversight, which raises questions such as whether mining companies that operate globally have become too big to manage at a time of increasingly complex environmental, social and government (ESG) issues, which require local solutions rather than centralised control.
Potash plays
Potash hopefuls racing towards production, such as Kalium Lakes, Salt Lake Potash and BCI Minerals, have the potential to be the backbone of a new resources business for WA; but it will not be as easy as some investors imagine.
The challenge for WA’s potash stocks is that they are all small, whereas potash is a bulk commodity business best suited to big producers able to enjoy economies of scale while also producing at a consistent quality to meet customer specifications.
A reasonable comparison is iron ore mining, which is currently booming and attractive to small producers able to hitch a ride on surging demand.
For much of the past 50 years, however, the iron ore sector has been dogged by low prices, which is why it is dominated by a handful of mega-miners.
Fortescue Metals Group is a rare exception to the iron ore rules written by the need to put transport economics and quality control ahead of the mining process itself.
Fortescue is, however, a business that rode the Chinese dragon to its success, whereas many small iron ore miners have blossomed, briefly, and faded when prices contracted.
WA’s emerging potash industry will face identical challenges of scale and quality, plus the likely entry of two of the world’s biggest miners, BHP and Anglo American, into the potash business over the next few years.
The other challenge with potash is the cyclical nature of demand, which rises when agricultural commodity prices are high, and falls when farmers can’t afford to buy fertiliser.
BHP and Anglo American will be able to ride out the farm commodity cycle. Smaller producers will struggle because bulk commodities are big company business.
