BACKFILL: High price of boom and bust

That’s fair enough – the industry rides on world economic cycles. When the world is confident, it buys and builds. To do that it needs minerals and energy. Quick, drill some more holes and dig some more stuff out of the ground and put it all on a ship – we need it yesterday.And then it’s a game of “pass the parcel”. Quick, we need more people – if we pull them from construction, transport and agriculture, they’ve probably got a lot of the skills we need. We’ll pay big to make sure we get ’em.Quick, we need more accommodation, more water, plant upgrades – we’ll pay, honest.And then, down the track, the economy’s gone down and we don’t want any more of your minerals and energy. Passed on down the line this translates to, “we don’t need all you workers”, “we don’t need all your contractors”, “we’re deferring/cancelling this project”, “we can’t see the need for more port/rail capacity”.Mining is a bugger of an industry. In many ways it is a form of legalised gambling. You gamble that an area of land is worth exploring, you gamble that resource is large enough and accessible enough to produce an economic return, you gamble that the price of the commodity over the economic life of the resource will be sufficient to produce an adequate return for investors.Those gambles have high cash-burn factors, even before there is a single dollar of return. Exploration is expensive, building transport and treatment infrastructure is expensive, the fleet required to mine the resource is expensive.Then you’ve got exchange rates to worry about.If the mining industry lived in a convenient box, quarantined from the rest of the economy, life would be much simpler – perhaps a bit like horse racing or motor racing. There you are boys, go and play with your toys and don’t disturb the neighbours.Unfortunately the sand box is not fenced. The fortunes of the mining industry have a huge effect on the whole country – and not all of it is good. The wages paid to attract skilled and semi-skilled workers have had an inflationary effect on wages in other sectors, and reduced the labour pool in other areas. When recruitment happens in this way, it doubly punishes the industries that assisted the worker to gain skills.The manner in which workers can be recruited and cast adrift as the fortunes of the resource sector fluctuate have social impacts, and that, along with the general remoteness of mines, is reasonable justification for higher than normal wages.When you add in the bunfights about who builds infrastructure, when it is built and who has access to it, then you’ve got even more disruption to the overall economy coming from one sector.The construction sector is exposed to at least two major highly cyclical sectors of the economy – housing and resources. Public infrastructure at least has a discretionary factor to it, and can be used by governments to provide a counter-cyclical boost during economic troughs. As public housing is negligible, the only means by which government can affect this market significantly is indirectly through such things as First Home Buyer Grants. We’ll swallow the theory that the government can’t muscle the Reserve Bank on interest rates, but any rate is too high for most when job security is lost.What the government can do to take some of the Wild West out of the mining sector is a matter for debate. Let’s have some fun, anyway. One thing that has got totally out of whack over quite a period of time is the remuneration of trades, in part because of shortages of skilled people created by the government looking to keep an excessive number of people in the school system and push them through tertiary education. This has also come about through many private sector employers being unwilling to bear their share of training through apprenticeships. For a long time the private sector lobbied to have government departments withdraw from construction activity because the private sector was more efficient. The government was also a great source of apprenticeships while it had its own labour force, and this left a vacuum that the private sector has done a poor job of picking up. One of the biggest single employer gripes is, “Why should I put the work into training someone when they won’t pay their way for years, and someone can come along and pick them off as soon as they start to make money for me?” It’s hard to answer that one, but perhaps the government model for tertiary education (of recovering the cost from the employee through the tax system, once the employee reaches a taxable income threshold) isn’t too bad – at least it would be equitable. The employer who took on the apprentice would be the beneficiary of the money raised.Why not take it a step further (applying it equally to HECS fees) and allow employers a tax deduction (with no fringe benefit tax implications) for payments made to assist employees with paying off their education debt. Presumably someone going into an industry that is a traditional poacher of skilled people would be in a good position to ask for such a payment as part of the remuneration package.Other aspects of mining bear looking at. Access to rail and port infrastructure is an issue for second-tier miners. The big multinationals can run their own race with their own rail lines and ports, but only the lawyers have been enriched by the battle for third-party access. If governments have other priorities and smaller miners are in danger of burning their cash before they start to earn, is there a role for a portion of the national compulsory super haul to be invested in a dividend-paying infrastructure fund? Would it hurt the government to top up the dividend in the early years, when the volume is low? The earlier and greater flow of royalties from having infrastructure in place earlier would surely pay back any concessions.

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