Minerals Council Warns of 5% Contraction of Aussie Economy Due to Cost Crisis

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By Vittorio Hernandez | September 18, 2012 9:29 AM EST

A modeling released Monday by the Minerals Council of Australia warned of a 5 per cent contraction in the country's economy due to the cost crisis that threatens to halt mining mega projects. To counter the threat, the council pushed the federal government to commit to controversial policies to bring back its competitiveness.

The Australian, quoting the report, pointed out that labour cost in the mining industry are among the highest in the world while increasing capital cost 66 per cent more to build new thermal coal project compared to the global average, while that for iron ore projects soared 30 per cent.

The study estimates that Australia's real gross domestic product in 2040 would be 5.3 per cent lower if it fails to initiate action to improve its competitiveness. If Australia regains its competitive edge, real GDP would increase to $102,511 per capita in 2040 while without the improvement, real GDP would only rise to $97,111 from $63,617 in 2010.

"Policy decisions made now can create or destroy an economic opportunity equal to more than 5 per cent of the Australian economy in 30 years, with lower minerals industry growth quickly translating into poorer economic performance," the report said.

The report pointed out that mining giants BHP Billiton and Rio Tinto used to have the lowest cost iron ore mines in the world, however, miners in third world nations such as Congo, Mongolia and Mozambique are matching or even offering significantly lower costs.

However, because of the skills shortages, wages of construction workers went up by an average of 9 per cent per annum in the last three years, while that for engineers ballooned 60 per cent higher than the global average.

Besides the soaring labour cost, the report said other factors that contribute to Australia losing its competitiveness and loss of market share include changes to royalties and imposition of the carbon and mining taxes by federal and state governments. In contrast, the last time that productivity increased in Australia was almost a decade ago in 2003.

Among the steps that the council recommended to address the problems are discussion of the opportunities and benefits at risk, tackle the cost pressures and structural reforms.

"Our future earnings will not be based on record commodity prices, rather on increased volumes resulting from our being able to deliver projects in a cost-effective manner. To maximise our opportunities we must ensure we maintain an environment which continues to attract investment to the benefit of the whole community," Resources Minister Martin Ferguson was quoted by AFP.

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