There is little doubt that falling demand for iron ore will have a negative impact on Western Australia as a whole. But what does it mean for agriculture specifically?
Iron ore prices have fallen 25% in the last 3 months on the back of a softening Chinese economy, particularly their property sector.
It doesn’t need the gifted love child of an engineer and an economist to model that the millions of tonnes of steel, in the form of reo, beams and cladding to build new Chinese apartment blocks, are no longer required if there are no buyers for the many apartment blocks already built. Accordingly, it is forecast by those that make a living doing so, that prices will fall further yet.
With a fall in Chinese steel demand impacting iron ore prices, the next domino to get a nudge is the profit and loss statements of WA suppliers– specifically high cost producers. Once the bottom line starts bleeding red, it's time to roll mothballs around the crusher. Already Min Res has announced they are shutting down their Yilgarn operations and mines of ancillary steel inputs, such as nickel, are closing faster than a pub at midnight – BHP’s Nickel West operations being the headline maker in WA.
What has any of this got to do with agriculture you may ask? Well, just like the mining boom had seismic impacts on all of WA’s industries over the last decade or two, so too will mining shrinkage. Let's have a look at some of the potential impacts.
Labour
The most notable impact of the mining boom years was that labour at all levels was swept up into well paid remote work. This in turn put pressure on wages in other industries as they tried to prevent staff from heading off to drive a Haulpak or design a remote rail crossing. The meme of new Hiluxes towing newer jetskis clogging Terminal 3 carparks was only partially an exaggeration.
But with mines being shuttered, FIFO labour will be looking for the next job down the road, and the quelled appetite for future expansion projects will reduce the St George’s Terrace workforce as well. Will there be a few additional diesel mechanics floating around regional areas? Another truckdriver or two? An extra civil engineer applying to work at CBH? Quite likely.
Regional towns
Although the big iron ore operations are based in the Pilbara, there are crossovers with the fringes of the wheatbelt in the Mid-West, Ravensthorpe region (nickel) and east of Merredin, along with supply chains snaking through farming areas, such as the standard gauge line terminating at the export port of Esperance.
Mining closures have a significant impact on nearby regional communities by way of loss of critical mass for local organisations and businesses. Does a town need a local primary school if the population halves? How about the basics like a general store? Or a pub?
At best, closures might lower January holiday congestion in the likes of Hopetoun but, generally, a smaller and less diverse economy is not good for regional communities.
Foreign Exchange
Along with interest rate disparity (the flavour of the month), mineral commodity demand is a key driver of the AUD vs global currencies. The AUD exceeded one US dollar in peak mining boom years due to the need to buy AUD to execute projects and pay for increased production as capacity rocketed. Now the AUD is hovering in the mid-sixties. The positive for Ag is that as AUD goes down, export prices for agricultural commodities go up. The downside is imports for inputs and machinery also go up. (Easy - sell APW at the bottom and buy DAP at the peak. If only it was so simple!)
If, and when, the RBA drops interest rates in line with other large economies, we should see the softer commodity influence take hold. Using back-of-the-envelope numbers, a cent drop in AUD/USD sees an additional $150m added to the value of the average WA grain crop.
Public Infrastructure
It's no secret that the health of the state’s finances is underpinned by mining royalties. At roughly 30% of total finance, with iron ore being around 80% of that, then a 25% drop will cut total state revenue by roughly 6%.
As royalties reduce, what will that mean for Ag? Although 25% of mining royalties are legislated to be spent in the regions as per Royalties for Regions (RfR), which includes agricultural communities, this is capped at $1B and, with current royalty levels over $10B, this bucket will not decline in the short term, even with substantial falls in iron ore price.
However, as the State Govt has stated only 9% of investment in the regions is through RfR (23-24 budget), then obviously reducing total revenue will mean there will be less money for the government to spend on regional roads, hospitals, schools, ports, biosecurity and so on, outside of RfR. Will Great Northern Hwy upgrades be delayed? Fewer funds passed to the local Shire to repair flood damage? No-one knows, but something always gives.
Wash-up
A falling iron ore price is a mixed bag for agriculture. A receding economic tide will expose rocks – and it's inevitable that a few of those will ground an agricultural boat or two.
