Diggers & Dealers 2017 - Day 1

Diggers & Dealers 2017 was kicked off this year by one of the most highly regarded economic and geopolitical policy thinkers of the past three decades – Robert Zoellick. In the space of just 40 minutes, he brought to bear his enormous breadth of knowledge of international relations, markets, monetary policy and global politics in a manner that easily connected with an audience more familiar with ore grades, commodity prices and hedge books. He set the tone for what is already shaping as the most energetic D&D in some considerable time.

In a wide ranging speech, Mr Zoelleck provided thoughts not just based on opinion but also his evident ongoing engagement with a detailed analysis of market trends across a wide variety of sectors and regions. He offered particular insight to our two largest trading partners, to whose fortunes and policy direction Australia and specifically the resources sector is inextricably connected – China and the United States.

On China, he offered the view that policy and economic management going forward will inevitably (or at least under current leadership) have at its centre the maintenance of the primacy of the Communist Party and its central role as the driver of economic direction and strategy implementation. He touched on a number of key elements of the country’s economic mix that are now central to the thinking of planners – continuing the path from developing to developed economy status, managing capital outflows (which are seen as a hedge against a domestic downturn), the drop in return on capital employed in a higher debt environment. A specific challenge for policy makers will be the need to move Chinese businesses up the value chain in the face of an annual decline in workforce of 0.6% p.a. (an accelerating) as the population ages.

The One Belt, One Road project has potential to better connect China’s excess productive capacity with the markets of Europe, though implementation at this early stage is somewhat fractious and disjointed. The initiative is also causing India to contemplate its role in the region, should the project really get traction.

Nonetheless, the Chinese market shows every sign of remaining central to Australia’s export performance as it turns even more to sea-borne iron ore as the source of its steel making raw materials. Urbanisation of the country looks set to continue and in an environment where global trade conversation now has a far greater element of protectionist sentiment than for several decades, China will continue to seek regional security of supply for its raw materials needs.

On the other side of the Pacific, Robert’s home country, the US is still in the third longest economic recovery in its history. While the President can be perceived as struggling to gain traction, there are those in his administration who are continuing to drive and achieve a deregulatory agenda which will likely aid in this continued recovery. The upswing is being driven by households as demand and incomes grow domestically. Consumer confidence is solid although the recovery of the housing market after the major adjustment some five years ago remains slow.

On the subject of the Trump administration, he was frank in his assessment of its direction, style and likely impacts. President Trump is by nature, transactional – not structural in his thinking. It’s all about the deal. We can expect that the agenda on trade, in particular, will be driven by domestic political considerations and perceptions: trade deals, immigration, action on ISIS, climate change. The President’s approach on all is to use them as symbols of his desire to reclaim US primacy. This will almost certainly lead to a protectionist approach – as per his withdrawal from the Trans-Pacific Partnership (TPP). He sees bilateral trade in similar terms and so trade deficits with individual countries are likely to bring policy reactions. Given Australia’s place between the US and China in the traded mix, this will be a factor to watch.

All of that said, Mr Zoellick was at pains to remind us that that the separation of powers enshrined in the US system is likely to act as a moderator to any unilateral moves on trade and he remains sanguine about the impact of a Trump presidency.

So what of the near future of Mining and Resources? Robert highlighted to return to the sector of the growth in capital intensity of its business model over the past 15 years. While this has seen lifts in productivity, it requires management of risk – specifically, Capital discipline, operating costs against inflation, volatility in our major market and economic nationalism/protectionism. Returns on Capital Employed remain low and need to be improved in some commodity segments if EBITDA levels are to return to long term averages. That said, the outlook is generally positive.

Perhaps with that in mind, he left us on a positive note. While some in the sector see the shift in the economy and in energy policy as a threat, he pointed out that renewable energy technologies are even more mineral intensive – if not so positive for hydrocarbons. He set the tone for a positive, forward looking “Diggers” and was an outstanding keynote and a welcome addition to the list of speakers who’ll present over the next three days.