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Monday, 1 June 1998
Page: 4373

Mr STEPHEN SMITH (9:17 PM) —I have put on record both in this place and in the main chamber itself that I regard as inappropriate the referral of the appropriation bills to the Main Committee. But, given the referral of these bills to this committee and given the agreement that we will all be briefer than usual, as shadow minister for resources and energy I will restrict my remarks tonight to one particular aspect of the budget as it relates to the resources and energy portfolio. Resources and energy is part of the primary industries and energy portfolio. The particular subprogram that I wish to refer to is contained within the appropriations of the Australian Geological Survey Organisation—or AGSO as it is known in the trade.

If you had reached for the budget papers at 7.30 on the relevant Tuesday night and you had read the press releases put out by the Minister for Resources and Energy (Senator Parer), you would have been forgiven for being left with the impression that AGSO had received $36.3 million additional funds for geoscientific work. That was the gloss that was put on it by the minister for resources. An amount of $36.3 million for geoscientific work is a good thing and I laud that. But, when you look at the detail, you will see that it is proposed to be expended not just for offshore petroleum—for oil and gas and condensate—but also for mineral areas onshore in conjunction with the states and the Northern Territory and the mapping accord. There are also proposals for exploration activity offshore within Australia's exclusive economic zone.

The sting in the AGSO budget, as in the resources and energy budget, is in the tail. What the minister does not tell you in his press releases, and what you need to read the fine print of the budgets papers to understand, is that on the one side you see the great lauding of this $36.3 million extra funding over four years but, on the other side, you discover that the minister has, without any fanfare, announcement or detail, initiated a review of AGSO. In advance of the establishment of the review, without anyone knowing what the terms of reference are and without anyone seeing what the detail of that review will be, it has already been predetermined that it will save $11 million per year for three years. That is $33 million over three years. If you work on the basis that you get $11 million per year, and you assume that that is recurrent, that is $44 million over four years. The sleight of hand and the sting in the tail is that the Commonwealth is actually proposing to spend less on geoscientific work through AGSO over the next four years than is currently the case.

So we have two things which need to be the subject of criticism in this area. Firstly, we have an unannounced, undetailed review of AGSO, the Commonwealth's geoscientific survey agency. In advance of the detail of that review and in advance of the review itself, the minister has already determined that $33 million over three years will be taken out of AGSO funding. In the context of an alleged $36.3 million increase over four years, it is a net loss to AGSO.

The second subject of great criticism is that this is precisely that point in the cycle where a Commonwealth effort on precompetitive geoscientific work would actually be helpful. It would be helpful because it is now precisely that point in the cycle where exploration activity and effort are required for the next phase of minerals and petroleum resource development in Australia.

I might make as the starting point a quote from the Prime Minister (Mr Howard) in the House at question time on 28 May 1997 last year when he said that investment and mining in this country had been brought `virtually to a halt'. That was the assertion of the Prime Minister in May last year. What the Prime Minister did not tell the House on that occasion was that, at precisely that point in the cycle, if you looked at capital investment in mining and exploration activity you found that capital expenditure had been up 13 per cent to nearly $7 billion since 1992, that exploration expenditure had been up nine per cent to nearly $2 billion since 1992 and that at that time ABARE had forecast that new capital expenditure would be up 25 per cent to over $9 billion by the 1996-97 financial year.

The relevant ABARE study at that point in the cycle, the March 1997 ABARE Outlook 1997 study, said:

Over the past four years new capital expenditure in mining has increased at an average of 13 percent a year in real terms, reaching $6.7 billion in 1995-96. New investment in the metal processing sector has also been rising, up 54 per cent in 1995-96 to $2.2 billion. Similarly, the resources supporting future minerals and energy sector growth have been sustained by exploration expenditure, which has increased by an average of 9 per cent in real terms over the past four years, reaching $1.7 billion in 1995-96.

In 1996-97, new capital expenditure in mining is forecast to increase by 25% to $9.2 billion.

So, two months before the Prime Minister had said things had virtually ground to a halt, the forecasts for capital expenditure or investment activity in petroleum and minerals resources were said by ABARE to be quite healthy. More recent statistics, such as the ABS December quarter private new capital expenditure release, which came out in late February this year, showed a 5.7 per cent real increase in mining industry investment. What we saw in the December quarter figures was that actual capital expenditure in mining had increased nearly 30 per cent in the year to the December quarter and the trend estimate for capital expenditure had been up for at least the last six quarters, and the expected future capital expenditure was also up.

The most recent ABS figures on private new capital expenditure for the March quarter, which came out last week on Thursday, 28 May—a year, almost to the day, after the Prime Minister said to the House that investment in mining activity had virtually ground to a halt—state:

In trend terms, the rate of growth of total new capital expenditure (at average 1989-90 prices) has been slowing over the past three quarters. Mining continues the pattern of strong growth evident over the past two and a half years.

Page 3 of the ABS release states:

Growth rates for expenditure by the Mining industry have been reasonably strong over the last ten quarters (between 2.8% and 7.7%). The current estimate of $2,594m is $516m (24.8%) higher than for March quarter 1997.

Bankers Trust, when commenting on the ABS release, said:

Investment in the mining sector rose by 3.1% following a 2.6% rise in the December quarter—continuing the pattern of solid investment within the sector. Investment in other selected industries . . . was flat, following a rise of 4.7% in the December quarter. In the past year, investment has risen by 2.3%, 15.7% and 0% in the manufacturing, mining and other selected industries sectors.

So, in the past year, according to Bankers Trust, investment in the manufacturing sector has risen by 2.3 per cent and investment in mining has risen by 15.7 per cent.

I detail those capital investment figures to make the point that often it is said by some, including the Prime Minister in May last year, that investment in this industry has ground to a halt. The capital investment figures belie that. That is not to say that there is not a range of issues or challenges which face the minerals and petroleum industries. There are a number of those which are worth drawing attention to. There has been a long-term decline in the commodity price cycle just about across the board so far as Australia's mineral resources are concerned. That is not just the cycle; it is the long-term trend. There has also been a long-term decline in the profits that the minerals resources sector in particular is making from invested capital.

Those capital investment figures in some respects give the lie to the old notion that capital follows profit. If you look at the Minerals Council of Australia and Coopers and Lybrand study, which comes out annually, that calculates that effectively, if you analyse the profit dividend in the minerals resources sector, the average from 1991 to now has been about seven per cent. In the last year, the profit on the invested capital was three per cent. For all the trouble that the industry has, it might just as well give the investment to you and me, Mr Deputy Speaker, and I am sure that we would be smart enough to work out that US treasury bonds and the exchange rate would give a better return than that for none of the problems. So you have a long-term potential decline in the profit made from the investment. You also have a long-term growing disinterest in resources as a vehicle for investment by institutional investors. That is reflected in that declining profit share that I have referred to.

There is also a bad market sentiment to the management of some Australian resource companies in some sectors of the industries. We have seen difficulties in gold following the RBA sell-off. We have the obvious difficulty so far as our export markets are concerned of the Asian difficulties and problems. So there is a range of long-term cyclical and structural difficulties which face our minerals and resources sector.

I was pleased to see that on 26 May the Minerals Council released a statement to coincide with its annual seminar and annual dinner which it holds in Canberra. Its executive director, Dick Wells, on behalf of the industry itself, released a statement which in part said:

The increase in competitive pressures resulting from the emergence of new low cost mineral deposits in other regions of the world, the growth in minerals supply from new sources opened up by global economic and political reforms places continued downward pressure on world commodity prices and changes the geographic flow of project funds and exploration dollars.

What is Mr Wells drawing attention to here? He is drawing attention to the fact that the chill wind of international competition is now very fiercely facing Australia's minerals and petroleum resource sectors. The competition for investment in the resource dollar is now a global competition and Australia needs to be up to the mark in that global competition. But the challenges are many and include the ones that I have referred to. Mr Wells goes on to say:

The ongoing long-term trend to lower commodity prices has meant mineral producers have had to continually improve operational efficiencies and reduce costs in order to maintain the profit margin necessary for the funding of additional developments and exploration programs.

The minerals industry understands that it does not operate in a vacuum and all that it does must occur in the context of the prevailing global and national economic circumstances. . .

So what Mr Wells is drawing attention to, to use his words, is the need to maintain the profit margins necessary for the funding of additional development and exploration programs. He is drawing attention to the need for Australia to continue its international competitiveness in the minerals and petroleum resources sectors in general and minerals resources in particular. What does that focus on?

If you work on the basis that in the end capital funds follow exploration funds, you have got the chill wind of international competition, you have got the opening up of other countries which have previously been under exploited or under explored. You have a whole range of world class ore bodies being discovered in other countries which have not previously been kicked over by explorers. So at precisely that point in the cycle where the Commonwealth could well profit in the future by an additional extra effort in geoscientific survey and exploration activity, to provide the private sector with the best basis for proceeding with its exploration activities in the future, we find the Commonwealth doing exactly the reverse of that which it should be doing. Rather than a net increase in funds for AGSO, a net increase in funds for geoscientific work at the Commonwealth level, what we find is the Commonwealth denuding those funds and reducing them.

So, as I return to my starting point, that needs to be the subject of strong criticism in two respects. Firstly, it is the wrong point of the cycle to be withdrawing funds from geoscientific work when the Commonwealth should be increasing funds in that area; and, secondly, to predetermine in advance an undisclosed review is bad ministerial conduct and bad administrative conduct.