PREAMBLE It must be rare in the annals of democracy that a political elite abrogates its right to govern the people. With those with whom I have discussed the plebiscite issue this constitutes a serious dereliction of parliamentary responsibility.
BACKGROUND It appears likely the plebiscite was intended to protect Liberal party figures from a public affirmation of their faith and/or their opposition to marriage equality. The trumpeted upside was the ‘people’ would decide. For a minority of Liberal conservatives the plebiscite would remove the embarrassment of a parliamentary debate and the possibility, that like the Disciple Peter, they would dishonour their faith before the ‘cock crowed twice’. (The Drum, 28January 2016)
Within the Australian electorate there is majority support for marriage reform as illustrated by a survey that showed Coalition 58%, Labor79% and Greens 97%. (SMH, 3 July 2016) Quoting this majority opinion the Australian Marriage Council has excoriated the plan to spend $160 million on a plebiscite. In view of these survey results, it is inexplicable why a rump of Liberal parliamentarians oppose a parliamentary vote unless it is by reason of their faith or conservative dogma to the detriment of sectarian democracy.
BROKEN PROMISES Much has been made by Government Ministers that an election promise of the Liberal party was a plebiscite. Honour is all unless there is a darker reason.
Below is an incomplete list of broken promises or identified untruthful statements attributed to Liberal party spokespersons since 2013. These are:–no cuts to disability pensions, monitoring Indigenous school attendance, no deals with the Greens to raise debt ceiling, funding cuts to ABC and SBS, no subsidies to coal or agriculture industries, cancellation of whaling/customs vessel, funding to NGOs, tow back of asylum boats, ensuring open and accountable government and the list goes on. (Alan Austin, Independent Australia, 8 February 2016)
A recent broken promise and an example of smoke and mirrors are:– (The Australian, 9 May 2016)
changes to superannuation arrangements
a dissimulation to the South Australian electorate on submarine construction. Until 2019 at the earliest work will only involve design and planning not construction jobs.
There must be something special about this promise for a plebiscite. Either there is a desire to keep faith with the electorate – unlikely, review the above – or, the Australian people are witnessing a small number of conservative Liberal party members absolve themselves of their parliamentary responsibility because of faith in an imagined reality and/or dogma. Many of the above broken promises involve budget constraints or electoral ‘pork barreling’, strangely despite the worsening national debt, there is no desire to cancel an unnecessary $160 million plebiscite expenditure, admittedly only an incremental amount in the overall national debt. This is not helping the trend in the light of a recent warning by the Credit Rating Agency, Standard and Poor, who have placed Australia on a downgrade watch. (AFR, 7 July 2016)
REQUIEM Australia aspires to be a modern open secular democracy. By not permitting a parliamentary debate and jeopardising the AAA credit rating, is it possible the religious inhibitions of a few are being forced onto the many?
The rapprochement (October 2016) between the Philippines President Duterte and Chinese President Xi Jinping, if consummated, will have immense ramifications. The apparent lack of resolve by the United States and Australia to curtail China’s creeping hegemony in the South China Sea may not be unrelated to Duterte’s decision.
In mid-October, the Australian Government (quietly) confirmed that the Australian navy will not conduct ‘freedom of navigation’ patrols within twelve miles of disputed territory. This policy was decided despite the findings of the International Tribunal (July 2016) that China is in violation of international law and, significantly, that 60% of Australian trade transits this waterway. Foreign Minister Bishop has declared that naval patrols in territory illegally claimed by China would ‘escalate tension’. (Wall Street Journal, 17 October 2016)
The reported attempt to de-escalate tension is at odds with a quote by Foreign Minister Bishop to the effect that ‘Australia will continue to exercise its international rights to Freedom of Navigation and Overflight. (Sky News Australia, 13 July 2016)
Chinese officials and Chinese media have not been oblique in their warning that Australia must ‘carefully talk and cautiously behave’. Does this constitute a threat to trade with China? The Chinese Global Times has warned ‘If Australia enters the South China Sea——-it will become a target for China to warn and strike. (Wall Street Journal, 17 October 2016)
Sitting on the Fence or not
The Australian dilemma has, in part, been created by the Obama Administration which is reported to have authorised only three naval patrols defined in appeasing jargon as one of ‘innocent passage’.
Since assuming office in early 2016, President Duterte must have been a bemused observer to the absence of strong pushback by the United States armed forces as Chinese hegemony cemented itself into the South China Sea.
With China an unchallenged rising power apparently facing down a ‘global power’, President Duterte appears to have jumped off the fence to ‘change horses in mid-stream’. China’s difficult financial state and its inferior military power compared to America has apparently not deterred the President.
Pivot to Asia
Recent historical events prior to the Philippines closer ties with China, are germane to this situation. In 2015, the United States provided the Philippines Government with $80 million to upgrade military hardware. Early in 2016, the Philippine Supreme Court, under a ten year agreement, granted America leave to upgrade and construct military bases.. (Military Times, March 2016) It was agreed the work would proceed at a slow rate in order not to antagonise the Chinese. (New York Times, January 2015)
President Duterte agreed to the construction of five army and airforce bases, one sited close to Manila and not far distant from the contested Spratley Islands. In a recent development (September 2016) President Duterte now requires American forces to withdraw from the Islamic southern Philippines and ?cancel construction of a proposed airforce base.
Through a Glass Darkly
There are serious implications should a China-Philippine union be consummated. The American Administration fears a domino effect and that other Asian nations might follow suit perceiving a safer future with the Chinese dragon rather than with the American pivot. The concept of US military bases in the Philippines could become untenable. There would be an impact on the ANZUS Alliance. Depending on any domino effect, there could be a problem for Trans Pacific Partnership negotiations.
Thinking ahead, the US Chief of Navy Operations, Admiral Greenert, in Canberra, indicated America is considering a naval base in Australia. No doubt ADF plans to construct a $125 million logistics facility in Darwin will reinforce US navy aspirations. Would Darwin port become a sophisticated Chinese listening post? (ABC News.February 2015)
In summary, geopolitical trends in the South China Sea have been unidirectional for more than a decade. Only a major intervention can now change the course of future history.
A Pleasing set of Numbers (Hockey – September 2014)
A Terrific set of Numbers (Hockey – June 2015)
The Best Growth Rate since 2012 ( Morrison – September 2016)
Then why oh why are:–
Australian living standards falling?
Young Australians unable to afford to buy a home?
Interest rates at 1,5%, the lowest ever?
Salvation lies in consistent positive Terms of Trade.
What is the proper message we should hear from Australian Government Treasurers? Below is a potted summary of the Australian financial situation from mid-2014 to mid-2016. It will be shown that the above adjectives tend to disguise the situation. This is a call aux armes citoyens to drive up our Terms of Trade and to ensure we are not bamboozled by misleading commentaries from our ruling elite.
The catalyst for this offering is Treasurer Morrison’s embrace of Australia’s mid-2016 accounts. To place his enthusiasm into context, we start with Treasurer Hockey in mid-2014.
In September, 2014 Mr Hockey indicated the National Accounts were “a pleasing set of numbers” which confirmed a consolidating economic momentum. As Mr Hockey was speaking, the Reserve Bank Governor, Mr Stevens, was warning of a dangerous bubble in the housing markets. It was ingenuous of Mr Hockey to indicate the GDP figure had risen by 0.5% in the June quarter but he had omitted to indicate that the real GDP had fallen by 0.3% due to the unfavourable Terms of Trade. The Reserve Bank of Australia considers the real GDP is a more meaningful measure of economic health. Treasurer Hockey knew this well. Was this deliberate omission or a senior ministerial moment? (SMH, September 2014)
Now forward to June 2015. The National Accounts for the the quarter ending June 2015 indicated GDP rose by 0.1% with an annual growth of 2.3%. (ABS) Treasurer Hockey enthused “a terrific set of numbers”. He indicated the Australian economy was among the fastest growing in the world. What Mr Hockey did not mention was that this period constituted the fifth quarterly drop in the Terms of Trade which was squeezing company profits, taxes and wages and that real net disposable incomes was now less than that in the September quarter 2008. (GFC) Australian living standards were falling for the first time in fifty years – and this is not a short-term trend. People are now spendings savings to make ends meet. This reduces domestic demand which knocks on to fewer job opportunities. (Financial Review, 3 June 2016)
Concurrent with Treasurer Hockey’s upbeat comments the Boston Consulting Group, Sydney, opined that Australia’s low interest rates (then 1.75%) and Government spending was producing a potential spiralling national debt burden. Compounding this fragile transition away from resources investment, the non-dwelling construction activity declined by 4.9%. What is happening in the economy is that national productivity is falling as growth moves away from low labour profitable mining to low paid intensive labour in tourism and hospitality. These are issues lurking behind the Treasurer’s enthusiasm. (Financial Review, 3 June 2015)
Forward again to September 2016. Treasurer Morrison has commented with gusto on the National Accounts for the June quarter. We are told there is no sign of a downturn in the economy which has grown by 3.3% – the best growth since 2012. There was also fulsome comment that the growth rate is a tribute to hard working Australians. No where, apparently, was there reference to a need to encourage exports and thus improve the Terms of Trade. Mr Morrison noted that the Terms of Trade for July showed a $285 m reduction on the June figure (ABS 5368.0) due to slightly increased exports and decreased imports which might indicate less disposable income was available for overseas goods.
Exports. June $25,706m. July $26,425m
Imports. June $28.957m. July $28,835m
What was not made clear by the Treasurer was that the 3.3% GDP growth was boosted by pre-election Government spending and, curiously, on increased expenditure on hepatitis C drugs. (SMH, 7 September 2016) Currently brakes on the economy are weak household spending, weak wages growth and a decline in the national hours worked. Irrespective of encouraging statements by the Treasurer, the historic low interest rate, now 1.5%, and low inflation rate of 1.0% (RBA band 2 – 3 %) is indicative of a sluggish economy.
The tentative conclusion, is that statements by recent Australian Treasurers cannot be accepted at face value. Their statements must be evaluated within the wider picture of the Australian financial situation. The driver for the future is a positive Terms of Trade that, initially, balances the budget from this jobs and growth and other benefits will follow.
Prologue This offering attempts to place the ‘Jobs and Growth’ song line into Australia’s current and projected economic situation. Background is Australia’s terms of trade, past innovations, the imperative for export income and closes with comment on poor academic achievement and Government funding as drivers for growth into the 21st century.
Preamble The slogan, ‘Jobs and Growth’ generates two issues:
If Australia is to prosper ‘growth’ must be directed toward generating export income.
In an expanding 21st century, economy improving education is necessary but unemployment is still forecast.
The policy of encouraging domestic employment will not increase the national wealth in an expanding population – it will merely churn the money supply. This activity will encourage quantitative easing, a devalued currency, deflation and more expensive imports – as experienced in Europe today.
‘Growth’ for Australia must be directed to generating export income. Much has been made of a ‘transitioning economy’ but the Government has apparently not articulated a specific sense of direction, although small business has been given a boost – but how much product is export oriented?
For Australia to prosper, the monthly terms of trade must be returned to positive, such that the national budget at least returns to break-even; this will stabilise the national debt. The flip side is that high tech export industries do not require a large relatively unskilled work force. Canada found transitioning toward a high tech economy does not substantially reduce unemployment but it does increase GDP.
Australian Exports, Imports and Terms of Trade In 2013, Australia produced a positive terms of trade (DFAT April 2016, dfat.gov.au/trade):
Top Exports – $329 billion. Iron ore, Coal-Gas-Petroleum, Wheat, Copper, Aluminium, Cotton, Wool, Gold, Financial services.
Top Imports – $318 billion. Travel-Freight-Transport services, Motor vehicles, Computers, Refined petroleum, Furniture, Telecommunication equipment, Heating/Cooling equipment, Iron-Steel-Aluminium structures, Professional services.
Terms of Trade + $11 billion. Additional impost is the interest on National Debt – $16 billion.
Since 2013 the terms of trade have moved into deficit. In the first half of 2016, the terms of trade ($ billion ) were: January 3.42, February 3.41, March 2.16, April 1.58, May 2.22, June 3.19 – that is around $15 billion. (tradingeconomics.com)
The budget deficit for 2016-17 is $37.1 billion which is forecast to decrease to $6 billion in 2019-20. (Australian Government Budget 2016-17) It is these deficits, among other factors, that provoked a warning from the Ratings Agencies on Australia’s AAA credit rating.
Jobs and Growth Australians cannot maintain their living standard by creating domestic jobs thereby churning the money supply. Our Nation must export more to improve the terms of trade. Government policy appears to be promoting any jobs rather than export oriented jobs – possibly a hidden agenda to reduce unemployment and maintain social stability. The main game is jobs that create export income. It is a sad fact that successive Australian governments have presided over the closing down of labour- intensive manufacturing industries, in part due to thin internal markets, high production costs and a strong currency boosted by a vibrant natural resources industry. To illustrate past, current and probably future closures, below is an incomplete list;
Ford-Toyota-Holden car plants, SA/Vic; Electrolux, NSW; Smiths Crisps, WA; Amcor, Vic/Qld; Buizen Yachts, NSW; Arrium, SA; Blue Scope Steel, NSW/WA and food producers Rosella, Windsor Farm Foods, Dairy Bell.
The picture is concerning despite, during 2015, over 300,000 jobs were created. Unfortunately, many were part-time and there was a trend for monthly hours worked to decrease. (Fact Check March 2016 and ABS June 2016) Critical missing information is the distribution of labour between domestic and export oriented jobs. ABS should collect this information.
Export industries up and running and with scope for immediate expansion are tourism and education:
Tourism, year ended June 2016. Recorded 7.85 million visitors – conservative income $6 billion.
Education for 2015. School/University students 270,000, Vocational students 70,000. (AFR December 2015)
To promote export industries, Australia has a rich gene pool of scientists, engineers and lively minds to draw upon. Examples of Australian brilliance are:
Science and Engineering. Aircraft Black Box, Electric Drill, Winged Keel, Frazier Lens, Racecam, Refrigerator, Splayds, Triton Work Centre, Atomic Absorption Spectrometer, Permaculture, WiFi, Underwater Torpedo, Photo Lithography, Stump Jump Plough, Mitchell Thrust Block Bearing, Humespun Pipes, Dethridge Wheel, Self Propelled Hoe, Coupé Ute, Froth Flotation, Quantum Bit, Anti-hacking Software, Blast Glass.
Medical. Spray-on Skin, Pacemaker, Cochlear Implants, Ultrasound, Plastic Lenses, Zinc Cream, Gene Silencing, Pollilight Forensic Lamp, Blood Test for Still -borns.
Australians are innovative and growth should be directed towards universities, research establishments and selected ‘garage’ entrepreneurs in a bid to improve Australia’s terms of trade. Despite the Turnbull quote “Innovation is the critical aim of the Administration”, both the Abbott and Turnbull Governments have reduced the influence of the CSIRO by budget cuts and retrenchments. Recently however, the CSIRO has been boosted with a $300 million Innovation Fund to promote a data driven economy, co-investment and an acceleration program.
Universities have also endured funding cuts in the 2016 Budget. A recent Vice-Chancellors’ meeting recorded “a deep disappointment at the proposal to reduce public investments”. Among the reductions was a $2.5 billion cut over the forward estimates to 2019-20 and a withdrawal of an efficiency dividend of $1.2 billion. These cuts are inexplicable in the light of a statement by Professor Ian Jacobs, Vice-Chancellor, UNSW who indicated on ABC RN (18 August) that in 2014 Australian universities contributed $60 billion to the Australian economy by way of innovation and commercial research.
The dilemma for the Australian Government’s ‘stairway to the stars’ is financially compromised by the competing requirements of Health, Social Security, NDIS and Education,; the latter, perversely, being critical.
Another brake on Australia’s drive toward an innovative future (jobs and growth) is the poor uptake by Australia’s youth in the STEM subjects. The OECD global education ranking for Australian fifteen year olds in maths and sciences was 14th. Rankings are: 1 Singapore, 2 Hong Kong, 3 South Korea, 4 Japan, 5 Taiwan——- —11 Poland, 12 Vietnam, 13 Germany, 14 Australia. As if on cue, there has recently been disappointing comment on NAPLAN tests in Australia.
In transitioning to a 21st Century high-tech industrial economy, Canada announced in 2015 their GDP increased but with little opportunity for increased employment.
A critical driver in the 2016 Budget to promote ‘jobs and growth’ is the reduction of tax rates from 30% to 25% over the forward estimates such that by 2026-27 cost to the taxpayer will aggregate $48.2 billion. (theaustralian.com.au/budget, 6 May: Smart Company, 3 May 2016) If the principal outcome of this initiative is to boost domestic employment supplying a domestic market, it will increase GDP but the terms of trade will deteriorate as business imports will increase, it is vital these tax benefits promote export growth. To round out this policy, the Government must actively encourage Australian industry to establish export markets and reward successful companies for this. This must become the mantra for ‘jobs and growth’ otherwise living standards will continue to fall.
Epilogue This opinion piece has attempted to examine issues lurking behind the Government’s song line ‘jobs and growth’.
The Chinese objective in the South China Sea is rational if one steps back in time to consider historical precedents.
Ignoring the theatrical assassination of Arch Duke Franz Ferdinand, an important cause of World War I was the German invasion of north-eastern France to control the coal and steel industry in this region. (International Encyclopaedia of the First World War, Pierre Chanceret)
Among causes for World War II was the German invasion of the coal and iron ore resources of Silesia and Sudetenland and the push towards the Caspian oil fields. Japan commenced war in the Pacific a little before these events in Europe by the invasion of Manchuria to control iron ore reserves in that region. Later Japan moved into south-east Asia to control tin, oil, coal and rubber resources.
China’s actions in the South China Sea are consistent with the above as this Power wishes to control potential oil and fish stocks. This policy reflects those of other aspiring Powers in the first half of the 20th Century. A principal finding of the 2012 Rio Resources Conference was “there is a coming desperate competition for resources.”
History books inform us, that during the 1930s, Europe ‘sleep walked’ its way to war. During this decade Nazi military build-up was clear but the Democratic West hoped, nay prayed, that the threat would disappear. So today, a comparable situation exists with China. Fast reverse to 1991 when Mount Pinatubu in the Philippines erupted. Among the devastation were the United States Clarke Air Force base and the Subic Bay Naval base. America withdrew its military might to Alaska and Hawaii thereby creating a military vacuum adjacent to the South China Sea. Within a few months, the Chinese Government proclaimed “The Law of Territorial Waters and their Contiguous Areas” which effectively ensured any fish and oil resources within the 9 Dash Line could be controlled by China. For 25 years, the Pacific Rim countries appeared to have ‘sleep walked’ their way to the present confrontation today.
Russia and China possess similar geopolitical threats. Russian policy is to maintain a buffer between itself and NATO by maintaining influence over Ukraine, Belarus and the Baltic States. In a similar way, the Chinese construction of forward defences along the 9 Dash Line distant from its littoral is understandable. China’s reaction to the chorus of ‘Rule of Law’ is no surprise.
Despite China’s unfavourable reaction to the ruling of the International Court of Arbitration, it has a serious problem. The Chinese navy is no match for the United States navy as it is not yet an effective fighting force,. (Beijing’s Blue Print for the South China Sea, George Friedman, June 2016)
Again, peering through an historical rear window, documents show that once aspirations for Empire take root in a ruling elite, the growth become virtually unstoppable. The life cycle of an Empire is rise, domination and implosion or destruction by a virile aggressor. Empires require vassal states to provide cheap raw materials and food. By mid century, 35 years hence, Australia’s future international status, which incorporates the Chinese controlled port of Darwin, may be different from that of today.
Another driver to Chinese assertiveness is the 200 year memory of European intervention, including the introduction of opium, into Chinese affairs. Muscle flexing truly commenced in 1997 with the return of Hong Kong and Macau to China by former colonial powers.
A flash point for this regional issue could occur in the East China Sea over the disputed Diaoyu/Senkakus islands. As at June 30, 2016, in the previous three months, Japanese military aircraft ‘scrambled’ more than 100 times due to suspected Chinese incursions into disputed air space, also in mid June a Chinese frigate entered the contiguous sea zone. (Japan Today, 30 June, 2016) The significance of these events is Article V of the United States – Japan Security Treaty which requires the signatories to support one another in the case of a third party attack.
As a concluding comment, Beijing must now walk a tightrope by maintaining the expectation of the Chinese people and enforcing an exclusion zone over the South China Sea.
Australia has a serious youth unemployment problem. For 2008, the 15 – 24 age group numbered 300,000 young people, that is, a 14 % unemployment rate. (Source Youth Unemployment in Australia, Dr Patrick Carvalho, November 2015)
Backpacker working visas granted during 2012 – 13 were 249,000. These young people found employment picking fruit, working on farms, hotel cleaning, in bars and restaurants. (Source Department of Immigration, August 2013) There is now one backpacker for every Year 12 school leaver. (Source Centre for Population and Urban Research, Monash University)
I was recently in a packing shed in central New South Wales, Korean backpackers were efficiently working. I asked why no Australian young people were in the mix. The owner snorted and stated he would not employ young Australians for several reasons from laziness to unreliability.
Our Australian culture still suffers from the legacy of ‘Loss of Empire’. We, as a nation, must come to terms with the fact that there must be young Australians in our midst who will remain ‘hewers of wood and drawers of water: aspirations for degrees and diplomas for some will remain pipe dreams and our political elite must face reality. The above ideas will be dealt with in more detail later. Contribution on this issue would be welcome. A variation on crowd funding!
BREXIT Calais Refugee Camps
A ‘boil’ barely mentioned but might be painfully ‘lanced’ is the international boundary between Britain and France, nominally in the middle of the English Channel. Currently, France assists Britain by placing the boundary on the seaward side of Calais – Britain pays millions of pounds a year for this service. There are now rumbles from the French Government that this cosy arrangement may be reviewed. There is now a possibility that the refugee camps containing some 18,000 displaced persons could be transferred to ‘This blessed plot, this realm, this England (Richard II). In recent months, France has foiled 37,000 attempts by migrants to reach the shores of Kent. (helprefugees.com and BBC News) Martello Towers and the ghosts of The Few and Francis Drake will be unable to repel this new invasion. This might become an unimagined consequence of the ‘Leave’ faction.
In 1991 Mt, Pinatubo, Luzon, Philippines erupted with devastating results, in addition to the appalling loss of life the eruption altered the Pacific balance of power and the course of history. The volcano destroyed two critical American military bases, the Clark Air Force Base and the Subic Bay Naval Base, both enormous military arsenals. America withdrew its assets to Alaska and Hawaii and immediately created a military vacuum. Within months of this withdrawal the Chinese Government promulgated a far reaching decree., “The Law on the Territorial Waters and their Contiguous Areas”. From this all else follows.
With the rise of China manifested by the Chinese Dream and the One Belt One Road aspiration contemporaneously with the Australian mining boom, it is interesting to dwell on the concepts of Foreign Investment versus Foreign Acquisition as they apply to Australian assets.
Germaine to this discussion are four factors relevant to Australian and Chinese commercial and strategic imperatives. (Professor Bath, Chinese and International Law, Sydney University)
Australia sees itself as a reliable supplier of minerals and agricultural products; China encourages the acquisition of natural resources to service national growth and its millions of citizens.
Australian companies invest for a commercial return; Chinese companies, some with links to Government agencies, are required to supply imports necessary for Chinese growth, profit for the overseas entities is less important.
Australia’s capitalist ethos requires returns to shareholders; China’s objective is to sustain growth over generations, profit is secondary. Three year political cycles and associated budgetary gymnastics are viewed with contempt.
The Australian government maintains a foreign investment oversight via the Foreign Investment Review Board (FIRB) on media, banking, airlines, airports and telecommunications. In Australia, China is making significant acquisitions in ports, power companies as well as mining and agricultural projects These are also subject to FIRB scrutiny with value or national security implications. China’s acquisition of Darwin port or south east Australian power companies appear to have other objectives than purely commercial.
Within informed society, Australia’s relationship with China is an important issue. For China, Australia is only a pawn in a grand expansionist strategy. Integral to the Chinese Dream are the commercial imperatives of the One Belt One Road policy. This policy is to revive trade and commerce along the ancient Silk Road linking China to western Europe augmented by the maritime trading routes that linked East Asia, East Africa, the Arab Middle East and thence to Venice.
This initiative has been dubbed China’s ‘Marshall Plan’ as it will promote trading links with countries along the transport corridors. This initiative will tend to reduce the importance of the North West Passage as Arctic sea ice retreats. In this grand scheme, Australia appears to be relegated to a ‘colonial ‘ source of minerals and agricultural products specifically for Chinese consumption.
It has been noted by Professor Hugh White, Strategic Studies Institute, Australian National University, that the acquisition of Darwin Port by the aptly named Landbridge company, with links to the Chinese government, may be a clue to Chinese ambition for Australia. The urban population of Shanghai is around twenty-two million; Australians must come to terms with the fact that, with a population around twenty-four million, a projection of national influence will be difficult.
Chinese Iron Ore Acquisition
Superficially, the foreign acquisition of iron ore mines in Western Australia appears to be a complex of large and small producers jostling for sales contracts; the reality is more sinister. The big picture reduces to a Chinese determination to break the monopoly held by Rio Tinto, BHP/Billiton and Vale de Rio Doce in Brazil. In 2013-14 Chinese steel mills imported 850 million tonnes of iron ore. Australian production was around 610 mt.
To force lower prices, Chinese companies acquired mines with only a modest production of five to fifteen million tonnes. These high cost operations tend to run close to break-even or a small loss. Falling iron ore prices thus means lower feedstock prices to the Chinese steel industry. For every $10 drop in iron ore prices the Chinese economy saves $8.5 billion. The $70/tonne drop in iron ore prices since 2013 has saved the Chinese economy more than $40 billion. (The Conversation, Canberra. May, 2014)
The Chinese government is astute enough to realise that:
increasing supply in an inelastic market, mine revenue will fall but buyers will receive more for less money.
upstream investment from unprofitable mine production makes economic sense. This is another form of transfer pricing beloved by multi-national foreign investors.
new production onto an oversupplied market is warranted under a Chinese procurement policy, but would not be considered rational by investors not involved into a vertically integrated process.
At any time, production from mines can be halted and the plant mothballed or restarted by a Chinese controlled Australian work force. The concern for the Australian Government is the future of infrastructure, population stability and employment continuity if Chinese state funded entities are investing in new production to force down prices rather than develop a profitable mining venture.
The economic politics of the West Australian iron ore industry, like a good strip tease, has been laid bare. The State Government will extend its Magnetite Financial Assistance Program for another year to two wealthy Chinese companies in an effort to preserve Australian mining jobs. The government will pay a $41 million subsidy to keep the 1000 strong work force in employment. The Chinese companies, Citic (profit $7.3 billion) and Ansteel operate the Pilbara Sino Ore and Karara magnetite deposits. Gindalbie Metals Ltd is the minority Australian partner. It appears Chinese mineral acquisition policy has engineered the Australian political system to subsidise local mining operations that ensures low operating costs that maximises profits in China by ensuring low cost feed stock for Chinese steel mills. (The Australian, 13 May, 2016)
Despite the reliability of Western Australia iron ore industry, there are warnings on the horizon. The Chinese objective is to diversify away from Australia and to a lesser extent Brazil as pre-eminent suppliers of iron ore, there may be a myopic tendency to regard Western Australia as an unassailable source of iron ore. There are monster deposits awaiting exploitation in sunburnt or freezing country in Guinea, Liberia, Mongolia and Brazil. (Fortune, Connected Logistics, February, 2016)
Concerning Brazil, it is a stirring giant. By 2018, Vale de Rio Doce is slated to exceed the combined production of Rio Tinto and BHP/Billiton in Western Australia. Currently, China is contributing $5 billion to Vale for the construction of five high tonnage iron ore carriers. (Investing News, November 2015; SMH, January 2014)
A conclusion that may be drawn from Chinese acquisition in the Australian iron ore industry, is that economic production in Australia is less important than the ability to source low cost feed stock for Chinese steel mills. This import policy will drive prices down.
In the frenetic fish bowl that small Australian mining entrepreneurs inhabit, the public are encouraged to support Initial Public Offerings (IPOs). Subsequent joint ventures with Chinese acquisitors will ultimately drive share prices into the bulldust to ensure low cost mine product. The Pilbara and Hammersley iron ore provinces have competitors overseas.
Chinese Lithium Acquisition
More than one million electric cars were anticipated to be in circulation by the end of 2015 with a planned 500,000 annual production by 2020. Lithium for car batteries are expected to grow by 10% a year. According to the United States Geological Survey (USGS), global reserves of lithium are in very tight supply,. The top four producers are:
TABLE. Lithium Producers
Reserves & Resources (tonnes)
Despite low production costs in Chile and Argentina, China prefers to obtain lithium ore from Australia. Currently, China is the largest lithium consumer- around 50,000 tonnes at a market price of $6,600/t. The price is forecast to rise as demand outstrips supply. (Batteries, Storage and Fuel Cells,.J Hunt, 2015)
In Australia, lithium reserves and resources are mainly confined to Western Australia where they occur in spodumene (lithium aluminium silicate) rich pegmatites. Deposits currently of interest to Chinese industry are (Investing News, July 2015; WestAustralian, September 2015):
Greenbushes. Talison Resources and Chengdu Tianqi Group. This is the world’s largest high grade spodumene deposit running 61.5 mt at 2.8% lithium oxide.
Mt Marion. Reed Industrial Minerals and Jangxi Garfeng. Deposit 14.8 mt at 1.3% lithium oxide.
Mt Cattlin. Galaxy Resources, formerly with Jiensu Lithium Carbonate Plant, now with General Mining, Canada, planning to re-enter the Chinese market. Deposit 9.9 mt at 1.1% lithium oxide.
Very early in Japanese industrial development, the Japanese government decided to preserve its forests and import timber from overseas. With large reserves of lithium, it appears China has adopted the same policy as the Japanese and is seeking off shore deposits. It is significant that the largest hard rock lithium deposit in the world has slipped from Australian to Chinese control.
Foreign investment in the Australian mining industry is necessary., Taxation policy must minimise transfer pricing and market price manipulation.
Chinese Agricultural Production Acquisition
The Chinese imperative for acquisition of Australian agricultural production is driven by a population estimate of 1.4 billion by 2050 which is coinciding with declining soil fertility and increasingly polluted water supplies. A UN report states that by 2050 food supply must increase by 50% and water supply by 30%. To meet this threat, the Chinese government has decreed that three billion dollars must be expended with celerity on overseas agricultural security, (Yahoo 7, June 2015) Target regions for agricultural acquisition and expansion are Africa, South America and Australia.
The acquisition process in Australia has taken on a permanent drip feed character to include all sections of the food chain from crops, animal husbandry to processing plants. These products will not be sold on the domestic market but will be exported to China. The Financial Review (September, 2015) ran the comment that, during the previous two months, agricultural acquisitions had been running at $40 million per fortnight. In the past few years examples of some purchases are:
Cattle Station search. Chongquing. Budget $100 million.
Cattle Station search. New Hope Group. Budget $500 million.
The above and below are a fraction of purchases across the agricultural industry that include:
Fifty dairy farms in Victoria acquired by ?COFCO Group involving 90,000 cows and 500 million litres of milk annually.
Sugar and sorghum development in Western Australia by Shanghai Zongfu. $700 million.
There is a growing trend for wealthy Chinese to enter the wine industry- vineyards are being actively purchased. Australians will soon be come aware of new names in the industry or on the labels, for example, Zhitai Wang, Kuifen Wang, Xin Jin, Yingda Investment Company and Xingfa Ma. The bottom line is -“the Chinese value land and wineries more than the Australians do”. (BBC News, October 2014)
There are two issues that discomfort the Australian people; first the apparent frequency of acquisitions and second, the opaque nature of the arrangements through the use of shelf companies, trust funds and extended settlements. (Daily Telegraph, February 2014) The FIRB is said to examine all foreign investment proposals exceeding $244 million, however, lower value investments do incur scrutiny. The comment ‘selling off the farm’ raises concern but an Australian Bureau of Statistics table (below) shows there is not yet cause for concern.
Agricultural Land %
Agricultural business %
Sheep, Cattle, Grain
TABLE Australian Agricultural Land and Agricultural Business Ownership.
The acquisition of Australian agricultural assets will continue and an increasing number of Australian managers and labour will have to accept instructions from Chinese owners. It was mooted (ABC RN 9 May) that under the Free Trade Agreement with China, Chinese labour might be permitted to work on agricultural projects.
There could be a financial downside to increasing acquisition of agricultural assets by Chinese interests. Currently, Australia sells 58% of its food production overseas; this represents 70% of the sector’s total value. Food exports for 2013-14 were valued at $40 billion. With increasing Chinese ownership, this export income will reduce and will tend to be exacerbated by transfer pricing and suppression of farm gate values by a technique similar to that employed in the iron ore trade. (Future Directions, September 2014)
At the end of May, the Bank of China with the Australian Chamber of Commerce hosted a conference principally on the dairy products industry. Over 600 Chinese delegates attended who are aware of the purchasing power of the anticipated three billion Middle Class in East Asia by 2030. (The World Today, ABC, 23 May) It would be naive to anticipate Chinese foreign investment, rather it will be foreign acquisition of Australian agricultural assets as already exemplified in Victoria and Tasmania. It makes commercial sense for foreign investors to acquire virtually a 100% equity and to create a vertically integrated export industry. An extension of the Mercantilist theory!
Since the Colonial period, Australia has relied heavily on foreign investment and this will continue into the future. What appears to be changing, is the subtle move away from infrastructure investment to natural resource and agricultural product acquisition, which, if carried out to an extreme,will result in the hollowing out of a nation. Foreign investment should ideally include the construction of tollways, railways, ports and mass housing but this appears not to be happening despite the concept of the Public Private Partnership (PPP) being well established. The problem is that the States are short of money and, like the Federal Government, carry unsustainable debt; hence the sale of Darwin port by the Northern Territory government and the sale of power assets in South Australia, Victoria and New South Wales to Chinese interests. The NSW Trans Grid sale of ‘poles and wires’ to China’s State Grid has recently been approved by FIRB, consideration $9 billion. The proceeds will go towards the rebuilding of sports stadiums. Back to the Roman coliseum!! (Daily Telegraph, November 2015)
A trend has been established and, if continued, there, will be significant redistribution of Australian assets. The President of the National Farmers Federation recently pithily remarked “foreign investors have spotted an opportunity domestic investors have shunned”. Of deeper impact is Australia’s destiny in the Chinese Dream.
Introduction. During my career I had the opportunity to observe Chinese culture in Malaya, Indonesia and the Solomon Islands and latterly in Australia. Although domiciled in these host countries the Chinese retained a strong affiliation with China and their heritage.
The Event. In Sydney, on the 12th April, there occurred a significant event supportive of Chinese activities in the South China Sea and by extension the ‘Chinese Dream’. The ‘Dream’ involves the betterment of the Chinese people combined with an aspiration to increase national influence in the East Asian region. On this day sixty people met under the auspices of the Chinese Patriotic Association of Australia to express unequivocal support for Chinese government policy. The principal points being:
A desire to support core interests of the Chinese nation.
A recognition the islands in the South China Sea belong to China.
Australia might be faced with a crisis situation.
These sentiments are the appropriate views of an overseas Chinese elite.
It is significant the Chinese Embassy in Canberra has, apparently, made no public comment but it is certain there would have been tacit approval.
History and Painful Politics. There are historical and current international issues which have logically conspired to promote this action by the Patriotic Association:
Over the past two hundred years China has experienced European aggression, colonialism and commercial exploitation, these yokes are no more.
There is a growing awareness among the Chinese population and the diaspora of 19th and 20th century history and of the dawn of the “Asian Century’.
There is a realisation the ‘Asian Dream’ is gaining momentum which engenders confidence and assertiveness among the rising intelligentsia.
Discussion. The wording of the published communique (SMH, 13 April) presents an exquisite problem for the Australian government vis a vis relations with China and with current multicultural policy. As a dictatorship, guided democracy or a Communist regime there would be a simple solution. As a democracy with enshrined free speech there are clearly more than fifty shades of grey at a time when tensions are increasing. With Australia supporting iAmerica in the right of untrammelled navigation in the South China Sea the comments of the Patriotic Association are unhelpful. Its stance could encourage more Chinese Australians to support its philosophy. Remember the Chinese student demonstrations in Canberra in 2008 involving policy on Tibet. It could take only an inflammatory speech or an emotive cause to mobilise a cast of thousands. It is certain the Chinese government is aware of this anti-Australia stance. It would be noted if if the voice of the Patriotic Front was silenced.
Diplomatic and Trade Mission to China. At the mid-April visit of the Prime Minister to China the Australian desire for peaceful negotiation over the South China Sea disputes was noted. as is the military alliance with America. The response by organs of the Chinese government constituted unveiled threats:
“Concerning the territorial disputes this will be a test of Australian leader’s political wisdom”. (National Institute of International Strategy, Beijing)
“This disagreement would tend to cast a shadow on promising cooperation if such a tendency keeps developing”. (Institute of World Economics and Politics, Beijing)
Such pronouncements from senior Chinese officials could encourage more assertive voices in Australia. The Beijing pronouncements should also be evaluated against the news America is positioning war planes in the Philippines. (SMH, 15 April). By an alliance with America Australia is also involved. An unpalatable conclusion is that support for American activities might damage trade with China as intimated in the above unveiled threats. To this mix add the complication of Chinese control of Port Darwin
The implacability of Chinese negotiation tactics should not be under estimated In 1981 President Deng Xiaping met Prime Minister Margaret Thatcher to discuss the Hong Kong handover in 1997. The talks ended with the comment by Deng Xiaping “I could march into Hong Kong any time and take it over if I wished.” President Xi Jinping cannot be any less forceful.
Multiculturalism. The second issue is the effectiveness of Australia;s multicultural policy in relation to the unpatriotic stance of the Chinese Patriotic Association of Australia. At a security conference in Germany (BBC, February, 2015) the United Kingdom Prime Minister stated multiculturalism had failed. British policy should have included a greater requirement for inculcation of a stronger national identity that could have reduced extremism. Current policy in Britain promotes a sense of separateness not integration.. National ethos that encourages a sense of Britishness is required. A similar logic could apply to Australia. However accommodating multiculturalism might become in Australia it is unlikely the Chinese diaspora will ever forgo their culture or allegiance to their roots.
Coaling Stations, Strategic Ports, a String of Pearls and a Priceless Pendant — the Darwin Time Bomb
The western Pacific littoral is verging towards a longitudinal arms race. Never forget Europe sleep walked its way to WW2. Dr Hugh White, Director, Strategic Policy Institute, Canberra (ABC Counterpoint, 14 March) stated ‘China and America are drifting towards a confrontation. They need to pull back’. Unfortunately this may not happen; for China because of the Chinese Dream and for America because it is still a superpower.The east Asian region and particularly China and Indonesia, together with the United States ‘pivot to Asia’ are beefing up their military forces. There are three problems, among several, facing the ADF:
Submarines, the design, lead time, national security and military objective.
Joint Strike Fighter, design, cost and combat readiness.
Darwin Port, the role of Darwin as a pendant below the Chinese ‘string of pearls’ from the South China Sea to the Persian Gulf.
The Australian Strategic Policy Institute (ASPI) estimates the cost of submarines to replace the Collins class vessels will be between $1.4 billion and $3.04 billion each with an estimated total cost of $36 billion. Submarines may not be ready until the mid-2030s.
National security cannot be overemphasised. At the conference ‘Submarine Choice’ (September 2014) hosted by ASPI Sweden very publicly removed its Kukums submarine contractor from German control citing a concern over militarism. Is there a warning signal for Australia with Japan as contractor?
With respect to the ill disguised position of Japan in the preliminary discussions, the Australian public is entitled to greater transparency. Is the situation related to the American ‘pivot to Asia’?
America is keen to bolster Japan both militarily and economically as a bulwark against China and it may well be that America will use the opportunity to insert its weapons systems into the construction contract. With a European contractor this might be more difficult.
The Australian Strategic Policy Institute (11th March) has produced a damming report on the dangers of using a Japanese submarine builder:
Japanese submarines have a 20-year life, not a 30-year life as required by the Australian navy.
Japanese shipyards have not built a submarine for operation in a distant theatre. French and German companies have.
The Japanese Soryu class submarines are 2950 tonnes; the Collins class submarines are 3100 tonnes.
The Soryu class has only two thirds the range of a Collins class submarine.
Japanese builders must redesign the submarines for extended under water propulsion. Beware the F35 debacle.
Why did Japan refuse to build submarines for India in India?
Modern submarines have a single pressure hull- the Japanese hulls are composite alloys. This may explain the shorter operating life due to metal fatigue.
French and German shipyards have discussed widely with Australian suppliers, Japanese have not.
French and German shipyards have built submarines for other navies. Japan has not.
Mr Abbott should explain to the Australian people why overt preference has apparently been given to Japan. In the murky world of the armaments trade, was America providing liminal pressure only visible to a Canberra cohort to support Japan?
At the Submarine Choice conference, there was reference to Australia’s unique requirements for its submarines. What are they? A senior naval consultant stated ‘Australia is the only navy in the world that flogs its submarines thousands of kilometres across the ocean before going on patrol’.
Among design circles, it has been mooted that due to the threat now caused by autonomous underwater vehicles, consideration is being given to an ‘aircraft carrier’ type concept, that is, a ‘mothership’ servicing smaller, less expensive and more expendable submarines. The problems for submarines patrolling an enemy coastline is they are increasingly vulnerable to sophisticated shore launched undewater drones.
The problem is these vessels have to be relevant for the next thirty years.
Joint Strike Fighter.
Grave concerns have surfaced on the design of the US built F35 stealth fighter. They are a long way from being combat ready although delivery to Australia was supposed to commence in 2012. The F35 is a venture between the States and Lockheed Martin, the project overrun is in the billions. The United States has been pressing its allies to accept a share of the cost overrun additional to their contract price.
The F35 is designed as an out -of-sight attack aircraft. In the dog fight situation, pilots state it is slower and less agile than other fighter aircraft and becomes a vulnerable target. Top gun pilots refer to the F35 as the ‘little turd’.
The seriousness of this situation is illustrated by the the Canadian Government; the decision has been made to pull out of the F35 project and its contract to acquire 65 fighters. (defencenews.com, October 2015)
Problems with the F35 are: (Business Insider, March 2015)
In flight and on the ground the electronics fail over 32*C.
Overall a high electronics failure rate.
Navigation and accuracy software is unreliable.
Fuel tank explosion problems.
Flight control system degrades over time.
The $400,000 pilot helmet can kill on ejection.
Cyber security not confirmed.
The current cost of these stealth fighters for the three services are:($US million)
Airforce – F35A – 148 million
Marine – -F35B – 251 million
Navy – —F35C – 337 million
Annual maintenance plus $2 million
Australia originally agreed to purchase 72 fighters in 2002 with delivery expected in 2012. There were delays. In 2015, the Government confirmed a $24 billion order for 58 aircraft (approx. $A400 million each), despite the problems. At the current March Senate hearings, a US spokesman was unable to confirm how many aircraft are on the production line, he thought between one and sixteen!! Delivery will be sometime in the 2020s.
The immense problem for Australia, as expressed by Dr Joiner, former head of ADF Test and Evaluation Department, is that ‘Australia must show more spine and consider the Canadian decision, otherwise Australia will end up with a plane not knowing what it can do and what it cannot do”. (ABC Background Briefing, March 2016) Who in Australia is prepared to spearhead a decision?
By serendipity, in mid=March, the Chief of the Australian Air Force launched a strident defence of the F35 on ABC News with reporter Andrew Greene. The forceful argument was, however, hedged with a proviso that if the F35 was further delayed F18 Super Hornets would be acquired which entered Australian military service in 2010.
Coaling Stations, Strategic Ports, a String of Pearls and a dangling Pendant — the Darwin Time Bomb
At its peak, the British empire protected its trade routes and maintained naval hegemony using its vital coaling stations and strategic ports, for example, Cape Town, Aden, Singapore and Hong Kong. Royal naval presence based in these ports maintained safe passage for British commerce.
Hong Kong was ceded to the British following the First Opium War in 1842. Later, Kowloon and the New Territories were leased to Britain for 99 years. Hong Kong and Territories were returned to China in 1997. During this 150-year period, Hong Kong was of immense commercial value to Britain.
Jog forward to 2000 AD. For the past 5000 years, empires have risen, collapsed and new ones risen. The Chinese Dream is in the ascendent and has materialised as a crusade for economic, political and military primacy in South-East Asia, Australia and New Zealand. (The Drum, November, 2015) For the first sixteen years of the 21st Century, the Chinese iron fist inside a silken glove has extended power with a glacial, inexorable momentum. No huffing and puffing by a super power or squeaks from an aspiring middle power has slowed this momentum. Expressions of diplomatic opposition are naive.
As a rising maritime power (like Britain), intent on increasing influence and commerce, China must protect its future maritime trading routes. This process has been dubbed the Chinese ‘string of pearls’. This, in reality, is a number of China friendly ports extending from the South China Sea to include ports in Vietnam, Bangladesh, Pakistan, Sri Lanka, Djibouti and Iran in the oil rich Persian Gulf. From naval bases in these countries China will protect its commercial interests.
The Darwin Port was leased to China for 99 years in November2015. Darwin constitutes a veritable Kohinoor diamond pendant hanging below the ‘string of pearls’. Darwin controls a strategic region close to the Australian east coast shipping lanes carrying coal and wheat and the west coast lanes carrying iron ore, offshore oil and gas and lithium concentrates. On Darwin’s near north are the oil resources of the Timor sea.
Currently there is a Senate Committee hearing on the Darwin port purchase and the national security implications of Chinese ownership. This is a story that is morphing from the bizarre to the surreal. That a sovereign nation would cede a strategic asset with national security implications to a potential enemy is beyond belief.
This story is gaining widening traction with revelations emanating from the Committee hearings. In November 2015, Landridge, a company with links close to the Chinese government, negotiated a 99-year lease with the Northern Territory Government, consideration $600 million. This is derisory. The application was approved by the Foreign Investment Review Board (FIRB) because ‘numerous subsidiary companies were involved which were under the FIRB radar’. FIRB approached the Australian Defence Force (ADF) three times and was informed the Navy was ‘comfortable’ with the lease, despite the fact that the Australian Navy would be excluded from the port in 25 years. Incredibly, ASIO admitted it had not ‘reviewed Defence needs’ relating to Darwin port. Following this government policy debacle, there is now a move for this type of foreign investment be subject to scrutiny by the National Security Committee. (AFR, 10 March, 2016)
An indication of unease behind the scenes is the US State Department conducting a nation wide opinion poll on Australians’ reaction to the Darwin lease. (AFR, 10 March) This is surreal – what has transpired within the US State Department to consider this move? The US Ambassador in Canberra has down-played, not denied, this poll.
Because of or inspite of the Darwin lease, a reinforcement is planned for the ‘pivot to Asia’. B1 bombers, capable of carrying nuclear weapons, are to be based near Darwin in order ‘to deter Chinese ambitions in the South China Sea. (SMH, 8 March) No doubt Darwin Port will advise Beijing when these bombers take off and return! Returning to empires, over the past 5000 years, history shows they die of exhaustion-they are not stopped in there tracks as they increase the size of their overseas possessions.
Unless the Chinese are expelled from Darwin now, because of an irregular FIRB submission, the Darwin facility will remain a thorn in the side of the ADF for 99 years.
Postamble. 2016 Defence White Paper (14 March)
Comment on the Defence White Paper will place the foregoing into context. Some elements of the strategic outlook are:
The relationship between China and the United States will be one of competition and cooperation. For the next two decades the US will remain the preeminent global power.
There will be challenges to global stability, however Australia can only prosper under a rules-based order.
The threat of terrorism will increase.
The Pacific region will suffer slow growth and modernisation.
Asian defence spending is exceeding that of Western Europe.
Australia’s military edge will decrease as regional nations modernise.
In the next twenty years, half the world’s submarines and military aircraft will be deployed in in this region.
There will be threats from space and cyberspace.
Recast in a different way:
The global and regional order will become less civilised.
Australia’s military will deal with uncertainty, not containment.
The Asian security environment will become more competitive and less cooperative.
There is the possibility of unexpected breaches of thresholds making sudden conflict likely.
Indonesia is pushing ahead with vigorous military modernisation.
To ensure Australian security the White Paper recommends the ADF:
Be empowered to project a more muscular response.
Become more agile, capable and responsive.
Must maintain a higher level of preparedness.
Overall the White Paper implies a sense of urgency.
A philosophical question – what is the purpose of the east Asian arms buildup? As in the European World Wars I and II, will the region split into two sides or will it degenerate into nasty little wars as occurred in South America, or will there be the equivalent of the Spanish Civil War where two larger powers tested their weapons on a destabilised country. Pax Deo!