Queensland Economy Watch

My former Treasury colleague Lachlan Shaw, Commodity Analyst at the Commonwealth Bank, has made some interesting comments regarding the outlook for the Queensland resources sector, as reported in the Toowoomba Chronicle yesterday:

“Queensland is, on a range of estimates, one of the most expensive if not the most expensive jurisdiction in which to build a new coal mine, rail and port capacity in the world,” Mr Shaw told APN…

…This is made worse by thermal and metal-making coal prices sliding downhill with thermal – or heating coal – now falling below $100 a tonne.

They are prices not seen since the second half of 2010.

Metal-making coal prices reached beyond $300 per tonne after the 2011 Queensland floods when less coal could make it to export but has been steadily falling.

As Queensland returns to form, Mongolia, Mozambique and China have muscled in and brought prices down.

Mr Shaw said it was bad news for not just the mine companies but the state and federal governments.

“Lower coal prices mean lower export receipts, income growth, miner profits and state government royalties although the lower Australian dollar provides a substantial offsetting when US dollars are converted into Australian currency,” he said.

“Lower coal prices also call into question the viability of future coal projects.”

The high cost of mining coal in Queensland is likely due to both high labour costs and the protracted time taken to obtain the necessary environmental approvals. High labour costs are largely unavoidable, but, on the issue of approvals, it appears the new Government is favourably disposed towards new developments, and indeed environmental groups are already agitated, as reported in the Business Spectator on Friday:

Concerns Qld Government gave Alpha mine leg up

As to whether Queensland’s resources sector is under threat from mining in countries such as Mongolia and Mozambique, the great advantage Queensland has is the stability of its rules and regulations and the low risk of the arbitrary expropriation of gains by ruling elites. In their great new book, Why Nations Fail, Daron Acemoglu and James Robinson argue one of the main explanations for differences in economic performance between rich and poor countries is that poor countries often have ruling elites that extract all they can from the economy with little regard for the rule of law, obviously discouraging investment and effort.

So while I agree with Lachlan that there are definitely risks to the Queensland resources sector, I think its long-term future is secure, largely owing to our stable political and legal environment, at least compared with many other resource-rich regions.