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Lower prices set to change the politics of foreign investment

By Damian Karmelich - posted Monday, 17 March 2014

The hit to national income from lower commodity prices is likely to force a dramatic re-think of Australians' attitude towards foreign ownership. Gone are the days when the country could reject the overtures of foreign investors safe in the knowledge that record high commodity prices would sustain living standards despite supply-side constraints.

In the new world where commodity prices have fallen from once in a generation highs volumes are going to have to rise if the government is to maintain, let alone grow, revenue. But tightening credit as the Federal Reserve winds back its bond buying program, capital flight as investors seek better returns than those offered by domestic resource projects and generally sluggish growth will make it hard to find the dollars necessary to finance new projects. Political restrictions that add to this burden have become counter-productive.

The need to think differently has become abundantly apparent. The Reserve Bank of Australia's (RBA) Index of Commodity Prices reveals a drop of over 25 percent from 2008 levels. For base metals the decline is over 50 percent since the peak of 2007. For a number of years those declines did not affect income as China, and to a lesser extent other emerging economies, gobbled up increasing volumes that compensated for the fall in prices. But as demand softens and new supply comes online Australia is grappling with the realities of being a price-taker at the same time that investment dries up.


The effects are already being felt. Australia's budget deficit will balloon to $47 billion this fiscal year as both prices and volumes fail to meet earlier optimistic forecasts. Spending will be cut in an attempt to close the gap between income and expenditure exposing Australians to an environment not experienced for well over a decade in which government largess is unable to keep pace with the ever growing demand for middle class welfare. Non-mining activity, where growth is sluggish at best, will not fill the gap.

Australia is not alone in facing this dilemma. Every resource economy in the world is confronted with the challenge of slowing demand, falling prices and the resultant decline in revenue. This reality is exactly what drove the Mexican Government to recently throw open its energy markets and expose its state monopoly to international investors. Reforms that were once unthinkable became necessary as Government cash flows declined with commodity prices and global capital was restricted from entering this potentially lucrative market.

Australia is likely to similarly re-think its approach towards foreign investment in the nation's critical resource sector as it strives to maintain a strong investment pipeline and increase volumes to compensate for lower prices. The recent decision by Treasurer Joe Hockey to remove conditions restricting 100 percent foreign ownership of Australia's biggest listed coal producer, Yancoal, is a sign that the new realities of commodity markets are starting to sink in. When explaining his decision Hockey particularly cited changed conditions in the coal industry including lower prices, mine closures and slowing demand.

This is unlikely to be an isolated incident. Over the coming years we can expect to see a more liberal approach to foreign ownership of mining assets as the Government seeks to top up the investment pipeline and increase supply to fill the revenue gap left by weaker prices.

Community concerns about foreign ownership, including from trade unions whose members rely on new investment for their jobs, is likely to wane as the impact of low prices reveals itself in our standard of living and level of employment. For foreign investors the political barriers to owning Australian mining assets are likely to become a whole lot easier to overcome.

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About the Author

Damian Karmelich is the managing director of political risk firm Political Monitor.

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