Economist warns of China price manipulation

THE chief economist of Sydney-based BIS Shrapnel has warned the entry of Chinese steel customers into Australia’s iron ore industry is a fatal mistake, akin to Japan’s entry into the country’s coal industry 30 years ago, and could signal the start of its demise.
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Frank Gelber, BIS Shrapnel chief economist.

Staff Reporter

“We can’t be nice guys and even handed about this,” Dr Frank Gelber told an audience in Perth on Friday.

“I remember for about 30 years we could never make a sensible profit out of producing coal because the Japanese who had interests in our coal production always kept a lid on prices,” he said.

“For 30 years they managed to control the market and it was only China’s entry into the sector that allowed us to get a good price for our coal.

“One thing we should have learnt long ago is never to let your competitors get in amongst your own team, and to be honest, we have been pretty bloody stupid about how we have done this.

“I am not saying that we should charge exorbitant prices, but I think we should give away some of our current returns in order to set up carefully, strategically negotiated government-involved contracts for long-term supply.

“If we have enough production Chinese-controlled on the supply side, the Japanese will probably want a bit of it too, then we will never get a sensible price for iron ore again and the industry won’t stand a chance.

“This is not an anti-Chinese statement, but you simply cannot have customers involved in the supply side of the business because they will control the price.

“If they were fragmented it would be easier to contain, but they are not, and can act as a monopoly.”

He also put forward an example of an Australian industry that has virtually been destroyed following 30 years of heavy Chinese investment – textiles.

“There were pretty aggressive with their competitors in Japan, the UK and Italy, which have been slowly marginalised and are just hanging on by the skin of their teeth,” Gelber said.

“Then, if you look at the Australian wool market, our producers can’t make a sensible living out of it anymore because the Chinese buyers are too powerful.

“China has killed Australia’s wool industry and it will kill the iron ore industry as well, unless we start to understand the commercial realities.

“This isn’t about China and Australia – it is about customer and producer and has got to be on the top of the mind of the Foreign Investment Review Board.”

In looking back on key economic and financial data post the global financial crisis, and more particularly Australia’s performance during that time, Gelber described it as more of a correction here than elsewhere.

“It is not time to invest yet, we need to see income growth before we can underwrite the next round of investment,” he said.

“That means we will run into capacity and labour constraints because we haven’t invested enough, and that will probably happen in around two years time.

“But we are coming out of this and are rebuilding, but it is still a disaster overseas.”

He also did not see a quick rebound around the corner and said the next “leg up” in the cycle would not occur until incomes started to rise which would, in turn, drive the next round of commodity price rises.

This, he tipped, would start to play out next year.

“But the big question over the next two to four years for us, is just how aggressive the reserve bank will be on raising interest rates,” he said.

Again, Gelber expects interest rates will reach 9% in the mortgage belt within four years.

He also predicted moderate to average growth over this time, but more akin to rolling investments for each sector of the economy.

However, he said if all the sectors become synchronised and augment each other, this would signal boom times once again, but would inevitably lead to a bust.

“It would be the 1980s all over again,” Gelber said.

He said Australia had been sheltered because it was not a developed western world economy in terms of its trade links, with 70% of exports going into China, Asia, Japan, India and east Asia.

“The problem for China, of course, is that their exports collapsed in the world recession because they had big markets in the US and Europe,” he said.

“Yet, they are adamantly saying that they don’t want to revalue the yuan because that is just other countries being protectionist, so there is a big political battle going on.

“But at the end of the day, production and exports have already rebounded.”

While he did not see the wind coming out of Australia’s bulk commodity sail, he was concerned about base metals and feared a price retraction.

“We specialise in the export of bulk commodities and raw materials rather than secondary processed material, but it worries me that we don’t have any diversification outside of resources,” Gelber said.

“Strategically as a country I worry about our specialisation here because we are losing the old domestic traded industries.”

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