- Email: [email protected]
Australian mineral commodity marketing
Australian mineral commodity marketing
Susan Bambrick
Commodity ness
export
is
costs,
Australia, export
requirements, union
focuses
include
control
and
and emphasizes
future
and
author the
individual two
for the future
processing
the
rights The
of
of importance
further
of such
government
aboriginal
on export
commodities,
case
environmental
attitudes.
marketing
and
the
and
affecting
controls,
trade
of
reliability
In
factors
considerations
prices,
attributes
supply
transportation.
-
by
physical
commodities,
issues
competitive-
influenced
before for
export
long-term
contracts. The
author
is
Senior
Economics,
The
University,
Canberra,
Lecturer
Australian ACT
in
National 2600,
Australia.
’ This was possible because of Australia’s position as a virtual monopolist in rutile supply at a time when ilmenite was not regarded as a close substitute.
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Although Australia has abundant mineral and energy resources, this does not guarantee that development, production and sale of minerals will take place; they will depend on world demand for the commodities and Australia’s competitive position. That position is summarized by prices, costs and the physical properties of the commodities relative to those offered by competitors. Prospective purchasers may also be interested in long-term reliability of supply; elements of this reliability include political stability and the availability and continuity of supply. Overseas purchasers are interested in government export controls, environmental requirements for mining, aboriginal land rights, and trade union attitudes. Shipping distance affects cost and, while it gives Australia advantages over its competitors in some markets (eg over Brazil in the Japanese iron ore market), it also results in disadvantages in others (eg coal for European markets). This paper examines export control, aspects of marketing of some specific commodities, and two issues of importance for the future - further processing before export and the future for long-term contracts.
Export control Under the Constitution the Commonwealth government controls foreign trade and, therefore, has the power to control the export of minerals. This export control power was used sparingly until the 197Os, although an export embargo was applied to iron ore before the second world war because of concern that Australia did not have reserves sufficient for its own needs; after the embargo was lifted and markets were accessible, the development of previously known deposits became economic, exploration mushroomed, and massive reserves were identified. Export controls were used to set a minimum price in negotiations in the 1960s for long-term iron ore contracts with Japan - when Australia had learned the bitter lesson that the minimum price becomes the actual price. Export controls have also been used to ensure that the primary separation of mineral sands was carried out in Australia,’ and to ensure that Australian uranium exports are used for peaceful purposes. In December 1972 the ad hoc imposition of export control was replaced by general controls on mineral exports, when the right-wing coalition government which had held federal power for 23 years was replaced for a three year term by a left-wing government (the
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Australian mineral commodity marketing
* In October 1978, and significantly only a few days before Mr Anthony’s move, Utah Development had to break off discussions with the Japanese on renegotiation of contracts relating to their Blackwater coal; the mills had hoped Utah would accept the same conditions as Thiess Dampier Mitsui. Meanwhile, the Japanese mills had successfully pressured the Canadian mills into removing escalation clauses, although in contrast with the Thiess Dampier Mitsui case, the Canadians achieved a price rise of $C 1.40/tonne for the two years. Between then and the Utah experience, the Canadian dollar depreciated by more than 10% against both the $Australian and WS. The Japanese were thus able to argue in the Utah case that Australian coal had become more expensive than Canadian coal in terms of the Japanese yen. ’ This has been frequently suggested and was mentioned again by the Minister at this time.
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June 1980
Australian Labor Party). The reasons given for the imposition of export control was the government’s concern that Australia was not earning world prices for coal exports to Japan and that iron ore producers were not maximizing national returns because of their fragmented negotiations in the face of unified Japanese purchasing. Since the return of a right-wing Commonwealth government (in 1975) general mineral export controls have been relaxed, although further concern with Australia’s strength in coal and iron ore negotiations with Japan led the Deputy Prime Minister and Minister for Trade and Resources, the Rt Hon J.D. Anthony, to introduce further changes in October 1978. The background to these changes was the coal and iron negotiations with Japan during the year which had resulted in reduced contract terms regarded as unsatisfactory by the Minister who was faced with the choice of granting them approval or of upsetting a signed contract (which he did not wish to do). Mr Anthony wished to ensure that Australian producers in the future did not compete against each other to the detriment of the national interest. The government’s move in October 1978 occurred when the Japanese steel mills were seeking reductions in coal prices and the removal of escalation clauses from contracts. In February of that year the Queensland coal producer, Thiess Dampier Mitsui, had to agree to price reductions for Moura coal of A$1.30/tonne on sales to Japan and the removal of all escalation clauses for two years. When the federal government came to approve the contract, it did so for only one year, hoping that this would prevent the Japanese mills from using the new terms to pressure other Australian coal producers whose contracts were up for renegotiation in 1979.* Australia’s market power when its coal prices are under threat is illustrated by the Thiess Dampier Mitsui experience. The company had the choice of accepting the Japanese demands and keeping its mine operating, or rejecting the demands and shutting down mines. Because several Australian coal contracts were approaching expiry, a Japanese threat not to renew was a major factor. There appeared to be three possibilities facing the federal government - that producers be required to consult and act together, like Japanese purchasers;3 that the export control power be used; or that government marketing authorities be established. This last possibility was, not surprisingly, unpopular with producers, and was in any case against the government’s philosophy (which, in general, supports private enterprise). The first possibility, that producers act in concert, had been shown before to have severe practical difficulties. Coal companies, for instance, have widely varying cost structures and marketing problems, and find it difficult to agree on uniformly satisfactory terms. In iron ore, a number of individual producers have at times upset the market by accepting a new low price, and the rest have complained - then used the same tactic themselves at a later date. Although Mr Anthony had in the course of 1978 warned coal (and iron ore) producers to collaborate, it was the export control mechanism that was chosen in October 1978, and, more specifically, control of the parameters of negotiation. On 24 October 1978 it was announced that companies would have to talk to the federal government before they began negotiations. Mr Anthony told Parliament that henceforth he would determine the parameters - eg pricing, tonnages, and duration of contracts - for mineral exporters
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Australian mineral commodity marketing
wishing to enter into negotiations under new or existing contracts. This approval would have to be obtained before companies began negotiations, and companies wishing to change the parameters during negotiation would need to seek a variation to this approval. He assured companies that he would make his determinations against the background of continuing consultation with industry and advice from his department. Companies were, however, concerned that prior determination of parameters by ministers and public servants might not reflect a familiarity with the market, and that the new provisions reduced the flexibility, speed, and secrecy necessary for successful negotiation in a commercial environment. While recognizing these shortcomings of the proposals, companies acknowledged that it may be useful in negotiation to be able to quote rigid government requirements. To this day, companies, and even individual people within companies, differ in their view on the guidelines. Mr Anthony’s statement received some condemnation from within his own coalition, and the vigour of implementation of the policy, and its breadth of application, was open to doubt at the time. As shown below, it does not apply uniformly to all mineral exports; and even where it can technically be applied with most strength, it appears to have caused minimum interference in commercial negotiations. The state Premiers of Queensland (a major coal producer) and Western Australia (the iron ore producer) were bitterly opposed to federal interference (despite the fact that they were of the same political persuasion as the federal government).4 After a series of meetings Mr Anthony was able to announce (6 June 1979) that agreement had been reached on consultation with the states, and that the guidelines would not be invoked until consultation with the state Premiers had taken place. There are currently (January 1980) three categories of export controls: 4 State Premiers meet formally with each other and with the Prime Minister from time to time (as do state and federal Ministers for corresponding portfolios. such as minerals and the environment). At one such meeting on 6 November 1978 (the Loan Council, which coordinates state and federal borrowing) the subject of the guidelines was discussed and Commonwealth and states agreed to further discussions. The tone on both sides was conciliatory. The Prime Minister announced after the meeting that there would be Commonwealth-state discussions of the guidelines at both Minister and officer levels and that companies would be involved in the discussions. He said that it was agreed that the states and companies would be consulted where necessary about the parameters for current negotiations so that they could proceed under the existing guidelines, without waiting for the review, and that the Commonwealth was ‘anxious to avoid a vacuum in negotiations in the immediate future’. 6The Commonwealth Government Industries Assistance Commission has recently recommended that the prohibition on scrap exports be lifted.
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(i> Where contracts
(ii)
(iii)
require specific approval. This is the case for the four commodities which were the subject of the October 1978 discussion - coal, iron ore, bauxite and alumina; it is also the case for copper scrap, except for contaminated scrap containing alloys which cannot be processed in Australia$ it is the case for copper - which in fact receives automatic approval; and it is the case for phosphate (which is the responsibility of the Minister for Primary Industry,rather than the Minister for Trade and Resources), for salt, for tin (because of Australia’s membership in the International Tin Agreement), and for uranium. Where exporters can obtain ‘blanket’ approval for exports of a particular commodity, but do not require specific approval for each contract. This is the case for bismuth, lead, manganese, mineral sands (for environmental reasons), nickel, tungsten and zinc. Where minerals are exempt. This is the case for gold, silver, minor metals (eg molybdenum, cadmium, arsenic), and all industrial and construction minerals.
As far as the operation of export controls is concerned, there are not (at January 1980) major implications for iron ore, bauxite, coal and alumina. One of the most discussed commodities in preceding months
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Australian mineral commodity marketing
a somewhat special case because of its had been uranium, environmental and strategic implications. The use of the export control power to prevent the export of mineral sands from Fraser Island is still being debated; and there is some pressure on the federal government not to increase the approved volume of exports of natural gas from the Northwest Shelf. The marketing of Uranium and natural gas will be dealt with separately below.
Gas marketing
* Indonesia
has been arranging gas sales to the USA since 1972, and even now not all the regulatory hurdles are crossed.
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Australia has been a significant exporter of liquid petroleum gas (LPG) for some years; it is currently planning to begin exports of liquefied natural gas (LNG) from the Northwest Shelf in Western Australia. The gas should be delivered to Western Australian customers from September-October 1984 and should be available to the Japanese market from April 1986 (conditional on when it is required). The federal government has approved the export of 6.5 million tonnes per annum for 20 years. However, the joint venturers in the Northwest Shelf project have recently decided to remove the LPG before export so that less of the gas is available for sale - purchasers will now receive 6.0 million tonnes per annum rather than 6.5 million tonnes. Each of the participants in the unincorporated joint venture Shell-BHP, Woodside, BP, Chevron - is to sell its own share, and, although general export approval was given more than two years ago, it has taken considerable time for each company to gain its own permits. Permits are issued for LNG for 20 years, allowing long-term contracts to be written and finance raised, but LPG is subject to separate permits, and contracts can be written for five years only. It is expected that in the early years of the project some LPG will be exported, but that local demand will grow and Australian priority may eventually reduce or even eliminate LPG exports. The natural gas marketing for export has not been involved in Mr Anthony’s guidelines for negotiations, although the Department of Trade and Resources has naturally expected to be kept informed of prices sought and, ultimately, obtained. Originally, the companies saw the natural gas approved for export as having two main markets: Japan, and the west coast of the USA. As early as 1972 the Pacific Gas Light Co of California was seeking gas from the Palm Valley-Mereenie field (in the Northern Territory) but the government at that time placed an embargo on natural gas exports until Australia’s reserves were further determined, and subsequently the field came to be regarded as much smaller than was first thought. The US market is currently not regarded as favourable by Australia; even if contracts were to be signed, there seems to be no guarantee that the gas can be imported into the USA, and, even if it could be, there is no certainty that the exact terms of a contract can be followed.6 While Australia and the USA have lost interest in each other in the gas market, at least temporarily (with the USA interested in Mexican and other continental gas), Australia has been concentrating on the Japanese market. Japan has expressed great interest in Australian energy resources in general. At the Australian-Japan Energy Symposium held in Sydney (October 1979) the Vice-Minister for International Affairs from Japan’s Ministry of International Trade
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Australian mineral commodity marketing
and Industry (Mr N. Amaya) stated that currently Japan is ‘working out a plan . . . to lower its dependence on imported oil from the present 75 per cent to about 50 per cent by 1990’. The 50% of non-oil sources was expected to include 63 million tonnes of steaming coal per annum, 90 million tonnes of coking coal, 53 million kW nuclear and 45 million tonnes of LNG. The present annual LNG consumption level of about 9 million tonnes was expected to increase to 29 million tonnes by 1985, and 45 million tonnes in 1990. Present LPG consumption (in which Australia has been a significant supplier) is about 8 million tonnes annually, but this is expected to be 20 million tonnes by 1985, and 26 million tonnes by 1990. Some of Japan’s expression of seemingly limitless energy demand may be a panic reaction to the activities of the Organization of Petroleum Exporting Countries (OPEC); some is certainly a reaction to the political situation in Iran; and some may be designed to stimulate an oversupply of energy production by Australian and other producers - and hence competition between them - to the customers’ benefit. The fact remains that the Japanese energy market is expanding from Australia’s viewpoint, and natural gas is one of the favoured sources. Japan then, has agreed to purchase Australia’s gas exports. Japan is an experienced gas importer, and is thus much readier to sign contracts than countries such as South Korea, which is interested, but less experienced, and therefore hesitant in signing contracts. Japanese power utilities have arranged the division of Australian natural gas between themselves, and as at January 1980, their letters of interest are expected to become ‘bankable’ letters of intent - a process which may be completed in the comparatively short time of three months. These will be ‘take or pay’ arrangements to facilitate financing of the development. The export of a specific volume of natural gas from the Northwest Shelf was seen by the federal government that was elected in December 1975 as necessary to bring Northwest Shelf gas on stream. During the period 1972-75, when the previous federal government had refused to consider such exports, the Western Australian government had pressed strongly for export approval on the grounds of the development expenditure this would bring to the state, and because the state needed gas to meet its domestic energy needs, although these alone could not economically justify development to private enterprise. Taking a long-term view (and bearing in mind New Zealand’s plans to use the Mobil process to produce methanol from its Maui gas), Australia may well decide that any further discoveries of natural gas should be reserved for its future needs. With liquid fuel not only expensive, but in short supply, that option must appear attractive at present, although it could alter if further oil discoveries are made, or if oil shale or coal appear more economic sources of liquid fuel.’ ’ As at January 1980, the local customer for the gas is the Western Australian Government’s State Energy Commission (SEC), which is planning to purchase 370 million ft a day. The SEC was offered a larger contract in 1979 but declined - it is looking to alternative energy sources like coal and uranium for its electricity generation, and is experimenting with wind power and solar power.
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Bauxite marketing About 40% of Australian bauxite production is exported, and the remainder is processed locally, at least to the alumina stage. Over 90% of alumina production is exported. The main foreign customers for bauxite are Japan and Europe (West Germany, Italy and France). For alumina, North America provides the largest market, followed by
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Australian mineral commodity marketing
Japan, Europe and New Zealand. Most aluminium exports are to Japan. Although bauxite will remain as a significant export, the emphasis is moving to more processed materials, because of Australia’s availability of relatively cheap energy. Further, as most Japanese aluminium smelters are losing competitive capability through both rising energy costs and the cost of pollution control, a shift towards offshore alumina refineries and aluminium smelters is logical. Because of the close control of the world aluminium industry by a handful of companies, Comalco, in developing its Weipa bauxite deposits in Queensland took a new approach by bringing together several smelting companies with specific alumina requirements; this enabled an economic large-scale alumina refinery (at Gladstone) to be financed, and its output has a certain market under ‘take-or-pay’ arrangements.8 In New South Wales an aluminium smelter is operated by Alcan Australia Ltd, and the state’s processing capacity is about to expand; Gove Alumina Ltd is planning a new smelter. Alcoa of Australia Ltd, which operates bauxite mines and alumina refineries in Western Australia, has a smelter in Victoria and is building a second smelter as well as considering construction of a third plant; Alcoa is also undertaking a new project in Western Australia; and a consortium of Australian, Japanese, and US companies is to construct a refinery in Western Australia. Although much of the bauxite from Weipa and Gove, and the alumina from Gladstone, Gove, and Western Australia is supplied to associate companies overseas, there is also a significant volume sold under long-term contract to arms-length customers in Japan, Europe, and the USA. Because bauxite is not a standard product, and alumina plants have to be designed to accept specific types of bauxite as feed, long-term contracts are essential to alumina producers. Thus the duration of contracts is usually very long, and may be in excess of 25 years. For early bauxite and alumina contracts, prices had to be adjusted outside contract provisions to take account of inflation and exchange rate changes. More recently, contracts provide for regular pricing reviews. For some alumina contracts, the price is a fixed proportion of world aluminium metal price. In contracts with Japan the contract currency may be US% or a mixture of A$ and Yen.
Coal marketing
eComalco also operates its own smelter in Tasmania in addition to overseas smelters, and is currently constructing a new smelter at Gladstone.
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The large coal developments of the 1960s and 1970s were primarily to supply coking coal to Japan, but in the future steaming coal sales - to Europe as well as Japan - will be important. The duration of existing coking coal contracts with Japan is up to 15 years. The contracts usually specify annual quantities, with plus or minus options of, say, 5-10% (subject to prior notification). In the early contracts, prices were expressed as a firm base price, with escalation for specified costs. Despite contractual commitments, however, regular price reviews have been customary since 1973. Prices now operative in coking coal contracts - generally fob prices - reflect market conditions rather than the cost plus of earlier years. The changing emphasis in contracts means that at present there are three types of coking coal contracts in the trade with Japan:
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Australian mineral commodity marketing 0
0
0
those where regular reviews occur outside contract provisions; those where contracts provide for regular reviews, although price is expressed in terms of firm and escalatable components (maybe with a limit to escalations); those where price is agreed regularly, maybe annually or every second year. There may be ‘no price, no contract’ provisions, which in effect render the contracts short-term.
Iron ore marketing Most Australian iron ore exports go to Japan, with the rest to Europe. For sales to Japan, contracts have been between Australian iron ore producers and a consortium of Japanese steel mills, for which two of the mills act as joint buying and negotiating coordinators. The duration of contracts has generally been ten to 15 years, so that the early contracts of the late 1960s and 1970s are expiring. Some contracts have been as long as 20 years or as short as six years. Quantity provisions are for a stated annual tonnage with plus or minus options (usually 10%) with due notice of actual requirements. In the iron ore trade this due notice is usually three months before the commencement of each contract year, in contrast with the general figure of six months for the coal industry. The traditional currency of the iron ore trade is US%; prices are usually fob. The early contracts had firm prices for agreed tonnages for extended periods, with some limits on subsequent price increases. For the latter half of the 1970s contracts due for repricing were being changed so that half of each producers’ tonnage is repriced each year. As with bauxite and alumina contracts with Japan and current coking coal contracts, iron ore contracts have generally included hardship clauses which allow both buyer and seller to seek relief from contract conditions causing undue hardship (where the conditions were not foreseen when the contract was signed). Adjustments have been made on both sides. Australian producers have agreed to defer price increases to help the Japanese mills, while the Japanese have agreed to increased prices because of devaluation of the $A and cost inflation.
Nickel marketing Nickel concentrates, matte, and metal are exported primarily to Japan, Western Europe, and North America. Because the world nickel industry is vertically integrated and producers of semiprocessed nickel products have limited market opportunities, longterm contracts are seen by producers as desirable. Until 1974 most nickel exported to Japan was in the form of sulphide concentrate, then nickel matte; the change was by mutual agreement of the parties to the contracts, and resulted in the shutdown of some Japanese smelting facilities. The duration of the contracts for semi-processed nickel products has been between eight and 15 years; prices are expressed US% cif and are agreed periodically. Until July 1977 the price was based on the refined nickel metal price quoted by Into Limited of Canada; since Into ceased publishing list prices, contract prices are usually based on world market prices.
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Australian mineral commodity marketing
Uranium marketing The federal government’s uranium export policy was outlined in a statement to Parliament on 1 June 1978 by Mr Anthony. The policy has four main aspects:9 (i)
Development approval for a particular project will be given only after consideration by the government following the completion of the necessary environmental requirements, compliance with the government’s foreign investment policy and, where appropriate, conclusion of arrangements with the aboriginal people.‘O (ii) The approval of the Minister for Trade and Resources is required before companies make any firm offers or enter into any legal commitments. The Minister determines appropriate terms and conditions consistent with the government’s nuclear safeguards policy covering such matters as -the duration of the contract -the quantity of uranium to be sold under the contract -the method of shipment of the uranium -the price payable for the uranium - the manner (including the currency) of payment. (iii) Contracts, on being negotiated, are then subject to government approval. (iv) Shipments of uranium under approved contracts are controlled on the basis of individual consignments under the Customs (Prohibited Exports) Regulations.
9 See also D.C. Hampson, ‘Australia’s uranium’, in this issue. loThe projects which at that stage had the status of development approval were Man/ Kathleen, Ranger, Nabarlek and Yeelirrie; a number of other projects have yet to receive approval. ” Mr Anthony said that the ability of Peko and EZ to obtain these contracts confirmed his belief that there is a substantial market for and interest in Australian uranium. He mentioned that other negotiations were proceeding for the sale of Australian uranium, and that he expected several more contracts to be obtained over the coming months.
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In (ii) and (iii), the Minister has available to him the advice of the Australian Uranium Export Office. This is not a Statutory Authority, but is encompassed within the Department of Trade and Resources. It was created not to market uranium - the responsibility of producers but to advise the Minister on commercial aspects of marketing, including the terms of conditions of individual contracts. In the negotiations between producers and utilities the Export Office is involved at two stages. First, companies are required to notify the Export Office that they are entering into negotiations with specific utilities; the Office advises the Minister; the Minister then gives a determination of the requirements to be reflected in negotiations. Second, once the companies have completed their negotiations, they submit the contract to the Export Office, and the Office advises the Minister whether the contract should be accepted or rejected. On 9 October 1979 Mr Anthony welcomed the announcement of the first contracts since December 1972, when the Labor government had refused to approve any new contracts. These new contracts were for uranium from the Ranger deposit, then under development. Electrolytic Zinc Company of Australasia Ltd and Peko Wallsend Operations Ltd had signed contracts for the sale, over the period 1983-92, of a total of 2 500 short tons of uranium concentrates to the Korea Electric Company. These contracts are worth, at current prices, a total of about A$160 million to A%180 million.” The Minister emphasized that deliveries under the contracts would be made pursuant to the terms of the bilateral safeguards agreement between Australia and South Korea which he signed on behalf of Australia on 2 May 1979. He explained that the safeguards
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agreement was one of a network of such agreements being concluded with countries meeting Australia’s safeguards conditions and was to ensure that when Australia supplies uranium for peaceful purposes, it would not be diverted to non-peaceful or explosive uses. The Minister’s belief that there is a substantial market for, and interest in, Australian uranium is generally shared for the medium term. Although the demand for uranium will continue to grow in the foreseeable future, the market is seen as relatively weak for the next five to seven years, but it is expected to improve at the end of this decade and into the next decade unless major new low-cost deposits are discovered.12 Most utilities have contracts or inventories through to 1983 or 1985 and are in no immediate hurry to sign contracts although they recognize that new production will be needed by the late 198Os, even without new nuclear programmes. Australia is conscious of the fact that in current market circumstances uncontrolled high-volume Australian production entering the world market could cause the price to fall further. This could benefit Australian production by delaying higher-cost new producers in other countries, but a substantial price fall could lead to a renewal of an import embargo by the USA, leaving Australia and other non-USA producers with the residual market. What are the most likely markets for Australian uranium at present? The Republic of Korea is a customer because of its rapid economic expansion and need for increased electricity generation. The USA and West Germany are major markets, but a further expansion of nuclear capacity may be delayed until their impending elections are over. France and the UK have positive programmes, and many other European combines have significant nuclear programmes. Japan is committed to increasing its nuclear-generating capacity; Mr Amaya, in his Sydney address referred to above, suggested a Japanese nuclear capacity of 53 million kW by 1990.
Upgrading of resources before export In common with many other raw material producers, Australia wants to increase the degree to which resources are processed before export. This would increase both earnings and domestic income and employment. However, customer countries often also want processing facilities, because this reduces their import bill and raises their domestic income and employment. Any aspirations of Australia to increase processing facilities is therefore subject to a market constraint. Refusal by Australia to sell raw materials can be met by customers switching to other suppliers; attempts by Australia to offer both processed and raw materials can be met by the imposition of tariffs or quantitative restrictions in customer countries. A number of factors may operate against customer resistance: 0
0 ‘*See
174
Hampson, op cif, Ref 9, for details.
Environmental pollution from processing may be such that customer countries may be happy to export this. It was thought some years ago, when environmental consciousness became the vogue in Europe and Japan, that this would create economic opportunities for Australia; it was subsequently discovered that in most instances overseas countries placed income and employment before environment. Large-scale plants in Australia supplying several countries can offer economies of scale to offset tariffs.
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Australian mineral commodity marketing
0
e
“The Deputy Prime Minister and Minister for Trade and Resources, the Rt Hon J.D. Anthony, announced on 8 November 1979 that the government was inviting the states to reexamine possible demand for electricity, and to submit new proposals for additional coalfor electricity projects based consideration under the Loan Council infrastructure financing guidelines. The previous year the Commonwealth had also supported a number of proposals from the states for special additions to their borrowing programme for electricity supply projects. I4 In Januan/ 1980, a joint statement by Mr Anthony. Minister for Trade and Resources, and Senator the Hon J.L. Carrick, Minister for National Development and Energy, listed the following as the aspects to be considered before final commitment was made: appropriate technology; environment factors: nuclear non-proliferation and safeguards: the choice of overseas partners: the possibility of multinational participation and what arrangements might yield the most commercially competitive Australian industry.
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Processed materials, being reduced in volume, can be cheaper to handle, although this can be offset by different modes of handling, or where freight costs are related, in some sense, to value. In the somewhat special case of uranium, part-processing (or conversion of yellowcake to UF,) creates more material, so there are more cylinders for transport; some A$2-3/lb is gained for conversion, but transport costs rise. For enriched uranium there is a reduction in transport costs. Australia has large resources of coal, and can produce relatively cheap energy. This makes it an attractive processing location for energy-intensive processing industries such as aluminium smelting and uranium enrichment.13
As noted above, a number of aluminium smelter proposals are either under study or are being implemented. Uranium enrichment is also under serious consideration. In January 1979 it was announced that the federal government is studying the economic feasibility of establishing a uranium enrichment industry. In January 1980 the government announced that as part of this process, four Australian companies (BHP, CSR, Peko-Wallsend, and Western Mining) had agreed to establish a joint venture (the Uranium Enrichment Group of Australia) to undertake a prefeasibility study on the possibility of establishing commercial uranium enrichment in Australia. The government has also had discussions with the governments of France, Japan, and the USA and with Urenco/Centec on the availability of enrichment technology.14 Market constraints for enriched uranium in the shorter term appear severe, but since it would take some years for an Australian plant to be operating the constraints may be more imagined than real. World enrichment capacity certainly seems adequate until at least 1990, and the Three Mile Island incident, and presidential elections in the USA and West Germany, may have caused this to slip further, so that perhaps 1993-95, would be the period to be contemplating coming on-stream. New plants, however, will face special difficulties in competing with established plants which are amortized. Australia has suggested that to ensure a market for enriched uranium new export contracts for uranium should include a clause requiring the customer to take a certain proportion in enriched form if this is available; since this does not fit the traditional pattern of purchasing in this industry - where uranium supplies and enrichment are contracted separately - there is likely to be customer resistance. Australia’s ability to force its customers into using its enrichment capacity would depend on its market power as a supplier of the raw material as well as on the competitiveness of its price for enriched uranium. The Australian government has available a number of policies which it can use to encourage further processing, but perhaps the most effective is to negotiate with other countries prolonged access for processed products, thus lessening the risk in private capital expenditure. For instance, at the Australian-South Korean discussions mentioned above, both delegations agreed to examine the possibility of increasing the level of raw materials processing in Australia to the mutual benefit of both countries, and they established a joint study group of South Korean and Australian officials. One of the reasons why prospective Australian processors would
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I6Part
176
A: Basic Iron and Steel Products.
appreciate guaranteed access to markets is that in most cases the Australian market is small relative to processing plants of economic scale. In the case of steel, however, the industry in Australia has to date existed to supply the Australian market, with exports being ancillary. For the past decade Australia’s monopoly steel producer, BHP, has exported on average around 25% of its iron and steel output, with the annual figure sometimes as high as 40% and never below 12%. These are high, by international steel industry standards, and may be explained by the company’s policy of installing plant of larger capacity than is warranted by the domestic market at the time, so that it can enjoy economies of scale. The highly volatile international market for steel means export sales as an adjunct to a domestic baseload may be feasible, but a large new plant based on export sales would be a different proposition. A feasibility study for a jumbo steelworks was made during the 1970s by an international consortium (with European, Japanese, North American, and Australian participants), but it was not considered economic at that time; the overseas participants were steel producers who would have taken the semi-finished steel to process in their own countries. The Commonwealth government’s Industries Assistance Commsision has after some years of enquiry produced its Draft Report on the Iron and Steel Industry. l5 The majority report suggests that Australia should undertake a major expansion of capacity based principally on export markets, and to this end suggests that the government should make export subsidies available - despite the fact that direct export subsidies are not well regarded internationally and could cause market disadvantages for the Australian product. Furthermore the level of subsidy suggested, although perhaps significant in absolute terms, was small relative to the level of investment required, and less effective an incentive to the end the Commission had in view than eg accelerated depreciation allowances. Fiscal incentives, such as accelerated depreciation and special investment allowances are but one type of direct federal government measures to facilitate processing. Provision of infrastructure, or of low-interest loans for state government-constructed or privatelyconstructed infrastructure, are another. In some cases a review of shipping arrangements may be necessary; eg trial shipping on a regular basis between Australia and South America and between Australia and the west coast of Africa began as a result of an enquiry by a government committee. In the Australia-South Korea discussions mentioned above, delegations agreed that a regular joint shipping service between the two countries should be inaugurated, although their action at that time had to be limited to agreeing ‘to encourage their respective shipping companies to continue their discussions’. The state governments also can assist processing by charging a lower royalty on minerals which are processed locally (this is already done in some cases). They can also revise their rail freights for processed products, and their power charges. The individual states and Commonwealth together can facilitate development by making clear in advance where, to what degree, and on what conditions the environmental pollution hazards from processing will be tolerated. At present, for instance, South Australia, Queensland, Western Australia, and, to a lesser degree, the Northern Territory, all appear interested in having a uranium enrichment plant located within their state -but selection and approval of a specific site would be a very lengthy process.
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POLICY June 1980
Australian mineral commodity marketing
Future of long-term contracts with Japan In Australia’s mineral development of the 196Os, for which the engine was Japan’s rapidly expanding need for industrial raw materials, both Japan and Australia were quick to appreciate the price stability and market access guaranteed by long-term contracts, not to mention the security they conveyed for the capital to be invested in Australian mines and Japanese industrial plants. The practice of writing long-term contracts has been extended to other countries and other bilateral relationships. The 1970s were, in general, a difficult period in world trade and put pressure on long-term contracts in the resources trade between Australia and its major customer, Japan. Inflation and currency instability caused problems where prices were fixed (or revised with a pricing formula) and recession meant difficulties for Japan in accepting the tonnages contracted. In many cases problems have been solved through mutual understanding and goodwill, but (as discussed above in the section on export control) in others there has been the feeling on the Australian side that the Japanese have taken unfair advantage of specific situations by enforcing not only tonnage but price reductions. There has quite probably, at different times, been a similar feeling on the Japanese side. The Australia-Japan Business Co-operation Committee, meeting at Osaka in September 1978, had presented to it a paper on ‘Longterm contracts in the Australian-Japan trade’. The paper was prepared on behalf of the Committee by a working group of six member companies, each with experience in long-term contracts with Japan; their research extended beyond that group. The paper suggested, inter alia, that if new projects necessary to Japanese and Australian development are to be ‘successfully launched and sustained’ in the 198Os, then confidence in long-term contracts has to be strengthened. The following terms for existing mining projects and contracts were suggested: 0 0 0
these long-term contracts should run their whole term; disputes should be resolved by (a) mutual agreement, or (b) pursuant to the specific terms of the contracts; neither side should seek to impose unilaterally a change in contract terms contrary to contractual provisions.
For new contracts 0 0
0 0 0 For
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POLICY June 1980
relating to existing projects, it was suggested that:
Pricing reviews may be desirable at intervals of not less than two years. If buyer and seller cannot agree on a price or pricing formula, then it should be the seller’s option whether the contract should be terminated with some notice, or whether the existing pricing arrangements should continue. Contract tonnages should be realistic, with limited scope for adjustment. Prices might be denominated in a basket of currencies, to take account of currency instability. A proportion of some long-term contract sales could be on a cif or caf basis. new projects,
the paper
suggests
that for security
of those
177
Australian mineral commodity marketing
lending, long-term contracts It is further suggested that: 0 0
0
“The paper makes the point elsewhere that ‘Japanese people often tend to think it unreasonable to insist upon legal rights where changing circumstances make a valid contract unduly burdensome to either party. This does not deny a recognition that the law still applies, only that there should be a waiver of rights’. Susan Bambrick holds the degrees of BEcon and PhD and lectures in Resource Economics and Industrial Organization at the ANU. She has directed courses for the Australian Mineral Foundation, and consultant for both worked as a government and industry. She is a Fellow of the Australian Institute of Energy, and a member of its federal Council, and is also a member of the Commonwealth Government’s Uranium Advisory Council and Trade Development Council. Her most recent book is ‘Australian Minerals and Energy Policy: ANU Press, Canberra, 1979.
178
have to be firm and legally enforceable.16
(i) Quantities should be fixed leaving only minimal flexibility possible. (ii) Where price reviews are considered appropriate, if mutual agreement cannot be reached, then the price or pricing formula in the contract should remain. (iii) Since the provisions of (ii) may be arduous for the buyer because of changing commercial circumstances, then Japan might establish an import credit guarantee insurance scheme, or else compensate the seller where the buyer cannot take his contractual tonnages.
At the October 1979 meeting of the Committee in Melbourne a paper on long-term contracts in Japan-Australia trade, prepared by the Japanese member companies, was presented. It suggested that longterm contracts in the 1980s ‘should be based on the fundamental understanding of the need for coping with the changing business environment, and should incorporate specific contractual provisions enabling the parties concerned to implement the concept in practice’. It also drew attention to existing long-term contracts which ‘guarantee the intake of quantity having no correspondence to the level of price’, and said that in future it will be necessary to link price and quantity in some way. It recognized specifically that ‘the future long-term contract of new development projects requires to be a bankable one so as to provide some guarantee on quantity, price and term’. How that sentiment is put into practice remains to be seen.
Prospect Long-term contracts will remain important in Australia’s export trade in energy (coal, gas, and uranium) and in iron ore, bauxite, and nickel. As long as the present federal government remains in power, these contracts should be negotiated by private enterprise, perhaps within guidelines laid down by the government, and certainly subject to final approval by the government. The government’s attitude will be conditioned, in part, by market forces.
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June 1980
Susan Bambrick
Commodity ness
export
is
costs,
Australia, export
requirements, union
focuses
include
control
and
and emphasizes
future
and
author the
individual two
for the future
processing
the
rights The
of
of importance
further
of such
government
aboriginal
on export
commodities,
case
environmental
attitudes.
marketing
and
the
and
affecting
controls,
trade
of
reliability
In
factors
considerations
prices,
attributes
supply
transportation.
-
by
physical
commodities,
issues
competitive-
influenced
before for
export
long-term
contracts. The
author
is
Senior
Economics,
The
University,
Canberra,
Lecturer
Australian ACT
in
National 2600,
Australia.
’ This was possible because of Australia’s position as a virtual monopolist in rutile supply at a time when ilmenite was not regarded as a close substitute.
166
Although Australia has abundant mineral and energy resources, this does not guarantee that development, production and sale of minerals will take place; they will depend on world demand for the commodities and Australia’s competitive position. That position is summarized by prices, costs and the physical properties of the commodities relative to those offered by competitors. Prospective purchasers may also be interested in long-term reliability of supply; elements of this reliability include political stability and the availability and continuity of supply. Overseas purchasers are interested in government export controls, environmental requirements for mining, aboriginal land rights, and trade union attitudes. Shipping distance affects cost and, while it gives Australia advantages over its competitors in some markets (eg over Brazil in the Japanese iron ore market), it also results in disadvantages in others (eg coal for European markets). This paper examines export control, aspects of marketing of some specific commodities, and two issues of importance for the future - further processing before export and the future for long-term contracts.
Export control Under the Constitution the Commonwealth government controls foreign trade and, therefore, has the power to control the export of minerals. This export control power was used sparingly until the 197Os, although an export embargo was applied to iron ore before the second world war because of concern that Australia did not have reserves sufficient for its own needs; after the embargo was lifted and markets were accessible, the development of previously known deposits became economic, exploration mushroomed, and massive reserves were identified. Export controls were used to set a minimum price in negotiations in the 1960s for long-term iron ore contracts with Japan - when Australia had learned the bitter lesson that the minimum price becomes the actual price. Export controls have also been used to ensure that the primary separation of mineral sands was carried out in Australia,’ and to ensure that Australian uranium exports are used for peaceful purposes. In December 1972 the ad hoc imposition of export control was replaced by general controls on mineral exports, when the right-wing coalition government which had held federal power for 23 years was replaced for a three year term by a left-wing government (the
0301-4207/80/020166-13
$02.00
Q 1980
IPC Business
Press
Australian mineral commodity marketing
* In October 1978, and significantly only a few days before Mr Anthony’s move, Utah Development had to break off discussions with the Japanese on renegotiation of contracts relating to their Blackwater coal; the mills had hoped Utah would accept the same conditions as Thiess Dampier Mitsui. Meanwhile, the Japanese mills had successfully pressured the Canadian mills into removing escalation clauses, although in contrast with the Thiess Dampier Mitsui case, the Canadians achieved a price rise of $C 1.40/tonne for the two years. Between then and the Utah experience, the Canadian dollar depreciated by more than 10% against both the $Australian and WS. The Japanese were thus able to argue in the Utah case that Australian coal had become more expensive than Canadian coal in terms of the Japanese yen. ’ This has been frequently suggested and was mentioned again by the Minister at this time.
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June 1980
Australian Labor Party). The reasons given for the imposition of export control was the government’s concern that Australia was not earning world prices for coal exports to Japan and that iron ore producers were not maximizing national returns because of their fragmented negotiations in the face of unified Japanese purchasing. Since the return of a right-wing Commonwealth government (in 1975) general mineral export controls have been relaxed, although further concern with Australia’s strength in coal and iron ore negotiations with Japan led the Deputy Prime Minister and Minister for Trade and Resources, the Rt Hon J.D. Anthony, to introduce further changes in October 1978. The background to these changes was the coal and iron negotiations with Japan during the year which had resulted in reduced contract terms regarded as unsatisfactory by the Minister who was faced with the choice of granting them approval or of upsetting a signed contract (which he did not wish to do). Mr Anthony wished to ensure that Australian producers in the future did not compete against each other to the detriment of the national interest. The government’s move in October 1978 occurred when the Japanese steel mills were seeking reductions in coal prices and the removal of escalation clauses from contracts. In February of that year the Queensland coal producer, Thiess Dampier Mitsui, had to agree to price reductions for Moura coal of A$1.30/tonne on sales to Japan and the removal of all escalation clauses for two years. When the federal government came to approve the contract, it did so for only one year, hoping that this would prevent the Japanese mills from using the new terms to pressure other Australian coal producers whose contracts were up for renegotiation in 1979.* Australia’s market power when its coal prices are under threat is illustrated by the Thiess Dampier Mitsui experience. The company had the choice of accepting the Japanese demands and keeping its mine operating, or rejecting the demands and shutting down mines. Because several Australian coal contracts were approaching expiry, a Japanese threat not to renew was a major factor. There appeared to be three possibilities facing the federal government - that producers be required to consult and act together, like Japanese purchasers;3 that the export control power be used; or that government marketing authorities be established. This last possibility was, not surprisingly, unpopular with producers, and was in any case against the government’s philosophy (which, in general, supports private enterprise). The first possibility, that producers act in concert, had been shown before to have severe practical difficulties. Coal companies, for instance, have widely varying cost structures and marketing problems, and find it difficult to agree on uniformly satisfactory terms. In iron ore, a number of individual producers have at times upset the market by accepting a new low price, and the rest have complained - then used the same tactic themselves at a later date. Although Mr Anthony had in the course of 1978 warned coal (and iron ore) producers to collaborate, it was the export control mechanism that was chosen in October 1978, and, more specifically, control of the parameters of negotiation. On 24 October 1978 it was announced that companies would have to talk to the federal government before they began negotiations. Mr Anthony told Parliament that henceforth he would determine the parameters - eg pricing, tonnages, and duration of contracts - for mineral exporters
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Australian mineral commodity marketing
wishing to enter into negotiations under new or existing contracts. This approval would have to be obtained before companies began negotiations, and companies wishing to change the parameters during negotiation would need to seek a variation to this approval. He assured companies that he would make his determinations against the background of continuing consultation with industry and advice from his department. Companies were, however, concerned that prior determination of parameters by ministers and public servants might not reflect a familiarity with the market, and that the new provisions reduced the flexibility, speed, and secrecy necessary for successful negotiation in a commercial environment. While recognizing these shortcomings of the proposals, companies acknowledged that it may be useful in negotiation to be able to quote rigid government requirements. To this day, companies, and even individual people within companies, differ in their view on the guidelines. Mr Anthony’s statement received some condemnation from within his own coalition, and the vigour of implementation of the policy, and its breadth of application, was open to doubt at the time. As shown below, it does not apply uniformly to all mineral exports; and even where it can technically be applied with most strength, it appears to have caused minimum interference in commercial negotiations. The state Premiers of Queensland (a major coal producer) and Western Australia (the iron ore producer) were bitterly opposed to federal interference (despite the fact that they were of the same political persuasion as the federal government).4 After a series of meetings Mr Anthony was able to announce (6 June 1979) that agreement had been reached on consultation with the states, and that the guidelines would not be invoked until consultation with the state Premiers had taken place. There are currently (January 1980) three categories of export controls: 4 State Premiers meet formally with each other and with the Prime Minister from time to time (as do state and federal Ministers for corresponding portfolios. such as minerals and the environment). At one such meeting on 6 November 1978 (the Loan Council, which coordinates state and federal borrowing) the subject of the guidelines was discussed and Commonwealth and states agreed to further discussions. The tone on both sides was conciliatory. The Prime Minister announced after the meeting that there would be Commonwealth-state discussions of the guidelines at both Minister and officer levels and that companies would be involved in the discussions. He said that it was agreed that the states and companies would be consulted where necessary about the parameters for current negotiations so that they could proceed under the existing guidelines, without waiting for the review, and that the Commonwealth was ‘anxious to avoid a vacuum in negotiations in the immediate future’. 6The Commonwealth Government Industries Assistance Commission has recently recommended that the prohibition on scrap exports be lifted.
168
(i> Where contracts
(ii)
(iii)
require specific approval. This is the case for the four commodities which were the subject of the October 1978 discussion - coal, iron ore, bauxite and alumina; it is also the case for copper scrap, except for contaminated scrap containing alloys which cannot be processed in Australia$ it is the case for copper - which in fact receives automatic approval; and it is the case for phosphate (which is the responsibility of the Minister for Primary Industry,rather than the Minister for Trade and Resources), for salt, for tin (because of Australia’s membership in the International Tin Agreement), and for uranium. Where exporters can obtain ‘blanket’ approval for exports of a particular commodity, but do not require specific approval for each contract. This is the case for bismuth, lead, manganese, mineral sands (for environmental reasons), nickel, tungsten and zinc. Where minerals are exempt. This is the case for gold, silver, minor metals (eg molybdenum, cadmium, arsenic), and all industrial and construction minerals.
As far as the operation of export controls is concerned, there are not (at January 1980) major implications for iron ore, bauxite, coal and alumina. One of the most discussed commodities in preceding months
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Australian mineral commodity marketing
a somewhat special case because of its had been uranium, environmental and strategic implications. The use of the export control power to prevent the export of mineral sands from Fraser Island is still being debated; and there is some pressure on the federal government not to increase the approved volume of exports of natural gas from the Northwest Shelf. The marketing of Uranium and natural gas will be dealt with separately below.
Gas marketing
* Indonesia
has been arranging gas sales to the USA since 1972, and even now not all the regulatory hurdles are crossed.
RESOURCES
Australia has been a significant exporter of liquid petroleum gas (LPG) for some years; it is currently planning to begin exports of liquefied natural gas (LNG) from the Northwest Shelf in Western Australia. The gas should be delivered to Western Australian customers from September-October 1984 and should be available to the Japanese market from April 1986 (conditional on when it is required). The federal government has approved the export of 6.5 million tonnes per annum for 20 years. However, the joint venturers in the Northwest Shelf project have recently decided to remove the LPG before export so that less of the gas is available for sale - purchasers will now receive 6.0 million tonnes per annum rather than 6.5 million tonnes. Each of the participants in the unincorporated joint venture Shell-BHP, Woodside, BP, Chevron - is to sell its own share, and, although general export approval was given more than two years ago, it has taken considerable time for each company to gain its own permits. Permits are issued for LNG for 20 years, allowing long-term contracts to be written and finance raised, but LPG is subject to separate permits, and contracts can be written for five years only. It is expected that in the early years of the project some LPG will be exported, but that local demand will grow and Australian priority may eventually reduce or even eliminate LPG exports. The natural gas marketing for export has not been involved in Mr Anthony’s guidelines for negotiations, although the Department of Trade and Resources has naturally expected to be kept informed of prices sought and, ultimately, obtained. Originally, the companies saw the natural gas approved for export as having two main markets: Japan, and the west coast of the USA. As early as 1972 the Pacific Gas Light Co of California was seeking gas from the Palm Valley-Mereenie field (in the Northern Territory) but the government at that time placed an embargo on natural gas exports until Australia’s reserves were further determined, and subsequently the field came to be regarded as much smaller than was first thought. The US market is currently not regarded as favourable by Australia; even if contracts were to be signed, there seems to be no guarantee that the gas can be imported into the USA, and, even if it could be, there is no certainty that the exact terms of a contract can be followed.6 While Australia and the USA have lost interest in each other in the gas market, at least temporarily (with the USA interested in Mexican and other continental gas), Australia has been concentrating on the Japanese market. Japan has expressed great interest in Australian energy resources in general. At the Australian-Japan Energy Symposium held in Sydney (October 1979) the Vice-Minister for International Affairs from Japan’s Ministry of International Trade
POLICY June 1980
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Australian mineral commodity marketing
and Industry (Mr N. Amaya) stated that currently Japan is ‘working out a plan . . . to lower its dependence on imported oil from the present 75 per cent to about 50 per cent by 1990’. The 50% of non-oil sources was expected to include 63 million tonnes of steaming coal per annum, 90 million tonnes of coking coal, 53 million kW nuclear and 45 million tonnes of LNG. The present annual LNG consumption level of about 9 million tonnes was expected to increase to 29 million tonnes by 1985, and 45 million tonnes in 1990. Present LPG consumption (in which Australia has been a significant supplier) is about 8 million tonnes annually, but this is expected to be 20 million tonnes by 1985, and 26 million tonnes by 1990. Some of Japan’s expression of seemingly limitless energy demand may be a panic reaction to the activities of the Organization of Petroleum Exporting Countries (OPEC); some is certainly a reaction to the political situation in Iran; and some may be designed to stimulate an oversupply of energy production by Australian and other producers - and hence competition between them - to the customers’ benefit. The fact remains that the Japanese energy market is expanding from Australia’s viewpoint, and natural gas is one of the favoured sources. Japan then, has agreed to purchase Australia’s gas exports. Japan is an experienced gas importer, and is thus much readier to sign contracts than countries such as South Korea, which is interested, but less experienced, and therefore hesitant in signing contracts. Japanese power utilities have arranged the division of Australian natural gas between themselves, and as at January 1980, their letters of interest are expected to become ‘bankable’ letters of intent - a process which may be completed in the comparatively short time of three months. These will be ‘take or pay’ arrangements to facilitate financing of the development. The export of a specific volume of natural gas from the Northwest Shelf was seen by the federal government that was elected in December 1975 as necessary to bring Northwest Shelf gas on stream. During the period 1972-75, when the previous federal government had refused to consider such exports, the Western Australian government had pressed strongly for export approval on the grounds of the development expenditure this would bring to the state, and because the state needed gas to meet its domestic energy needs, although these alone could not economically justify development to private enterprise. Taking a long-term view (and bearing in mind New Zealand’s plans to use the Mobil process to produce methanol from its Maui gas), Australia may well decide that any further discoveries of natural gas should be reserved for its future needs. With liquid fuel not only expensive, but in short supply, that option must appear attractive at present, although it could alter if further oil discoveries are made, or if oil shale or coal appear more economic sources of liquid fuel.’ ’ As at January 1980, the local customer for the gas is the Western Australian Government’s State Energy Commission (SEC), which is planning to purchase 370 million ft a day. The SEC was offered a larger contract in 1979 but declined - it is looking to alternative energy sources like coal and uranium for its electricity generation, and is experimenting with wind power and solar power.
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Bauxite marketing About 40% of Australian bauxite production is exported, and the remainder is processed locally, at least to the alumina stage. Over 90% of alumina production is exported. The main foreign customers for bauxite are Japan and Europe (West Germany, Italy and France). For alumina, North America provides the largest market, followed by
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POLICY June 1980
Australian mineral commodity marketing
Japan, Europe and New Zealand. Most aluminium exports are to Japan. Although bauxite will remain as a significant export, the emphasis is moving to more processed materials, because of Australia’s availability of relatively cheap energy. Further, as most Japanese aluminium smelters are losing competitive capability through both rising energy costs and the cost of pollution control, a shift towards offshore alumina refineries and aluminium smelters is logical. Because of the close control of the world aluminium industry by a handful of companies, Comalco, in developing its Weipa bauxite deposits in Queensland took a new approach by bringing together several smelting companies with specific alumina requirements; this enabled an economic large-scale alumina refinery (at Gladstone) to be financed, and its output has a certain market under ‘take-or-pay’ arrangements.8 In New South Wales an aluminium smelter is operated by Alcan Australia Ltd, and the state’s processing capacity is about to expand; Gove Alumina Ltd is planning a new smelter. Alcoa of Australia Ltd, which operates bauxite mines and alumina refineries in Western Australia, has a smelter in Victoria and is building a second smelter as well as considering construction of a third plant; Alcoa is also undertaking a new project in Western Australia; and a consortium of Australian, Japanese, and US companies is to construct a refinery in Western Australia. Although much of the bauxite from Weipa and Gove, and the alumina from Gladstone, Gove, and Western Australia is supplied to associate companies overseas, there is also a significant volume sold under long-term contract to arms-length customers in Japan, Europe, and the USA. Because bauxite is not a standard product, and alumina plants have to be designed to accept specific types of bauxite as feed, long-term contracts are essential to alumina producers. Thus the duration of contracts is usually very long, and may be in excess of 25 years. For early bauxite and alumina contracts, prices had to be adjusted outside contract provisions to take account of inflation and exchange rate changes. More recently, contracts provide for regular pricing reviews. For some alumina contracts, the price is a fixed proportion of world aluminium metal price. In contracts with Japan the contract currency may be US% or a mixture of A$ and Yen.
Coal marketing
eComalco also operates its own smelter in Tasmania in addition to overseas smelters, and is currently constructing a new smelter at Gladstone.
RESOURCES
The large coal developments of the 1960s and 1970s were primarily to supply coking coal to Japan, but in the future steaming coal sales - to Europe as well as Japan - will be important. The duration of existing coking coal contracts with Japan is up to 15 years. The contracts usually specify annual quantities, with plus or minus options of, say, 5-10% (subject to prior notification). In the early contracts, prices were expressed as a firm base price, with escalation for specified costs. Despite contractual commitments, however, regular price reviews have been customary since 1973. Prices now operative in coking coal contracts - generally fob prices - reflect market conditions rather than the cost plus of earlier years. The changing emphasis in contracts means that at present there are three types of coking coal contracts in the trade with Japan:
POLICY June 1980
171
Australian mineral commodity marketing 0
0
0
those where regular reviews occur outside contract provisions; those where contracts provide for regular reviews, although price is expressed in terms of firm and escalatable components (maybe with a limit to escalations); those where price is agreed regularly, maybe annually or every second year. There may be ‘no price, no contract’ provisions, which in effect render the contracts short-term.
Iron ore marketing Most Australian iron ore exports go to Japan, with the rest to Europe. For sales to Japan, contracts have been between Australian iron ore producers and a consortium of Japanese steel mills, for which two of the mills act as joint buying and negotiating coordinators. The duration of contracts has generally been ten to 15 years, so that the early contracts of the late 1960s and 1970s are expiring. Some contracts have been as long as 20 years or as short as six years. Quantity provisions are for a stated annual tonnage with plus or minus options (usually 10%) with due notice of actual requirements. In the iron ore trade this due notice is usually three months before the commencement of each contract year, in contrast with the general figure of six months for the coal industry. The traditional currency of the iron ore trade is US%; prices are usually fob. The early contracts had firm prices for agreed tonnages for extended periods, with some limits on subsequent price increases. For the latter half of the 1970s contracts due for repricing were being changed so that half of each producers’ tonnage is repriced each year. As with bauxite and alumina contracts with Japan and current coking coal contracts, iron ore contracts have generally included hardship clauses which allow both buyer and seller to seek relief from contract conditions causing undue hardship (where the conditions were not foreseen when the contract was signed). Adjustments have been made on both sides. Australian producers have agreed to defer price increases to help the Japanese mills, while the Japanese have agreed to increased prices because of devaluation of the $A and cost inflation.
Nickel marketing Nickel concentrates, matte, and metal are exported primarily to Japan, Western Europe, and North America. Because the world nickel industry is vertically integrated and producers of semiprocessed nickel products have limited market opportunities, longterm contracts are seen by producers as desirable. Until 1974 most nickel exported to Japan was in the form of sulphide concentrate, then nickel matte; the change was by mutual agreement of the parties to the contracts, and resulted in the shutdown of some Japanese smelting facilities. The duration of the contracts for semi-processed nickel products has been between eight and 15 years; prices are expressed US% cif and are agreed periodically. Until July 1977 the price was based on the refined nickel metal price quoted by Into Limited of Canada; since Into ceased publishing list prices, contract prices are usually based on world market prices.
172
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June
1980
Australian mineral commodity marketing
Uranium marketing The federal government’s uranium export policy was outlined in a statement to Parliament on 1 June 1978 by Mr Anthony. The policy has four main aspects:9 (i)
Development approval for a particular project will be given only after consideration by the government following the completion of the necessary environmental requirements, compliance with the government’s foreign investment policy and, where appropriate, conclusion of arrangements with the aboriginal people.‘O (ii) The approval of the Minister for Trade and Resources is required before companies make any firm offers or enter into any legal commitments. The Minister determines appropriate terms and conditions consistent with the government’s nuclear safeguards policy covering such matters as -the duration of the contract -the quantity of uranium to be sold under the contract -the method of shipment of the uranium -the price payable for the uranium - the manner (including the currency) of payment. (iii) Contracts, on being negotiated, are then subject to government approval. (iv) Shipments of uranium under approved contracts are controlled on the basis of individual consignments under the Customs (Prohibited Exports) Regulations.
9 See also D.C. Hampson, ‘Australia’s uranium’, in this issue. loThe projects which at that stage had the status of development approval were Man/ Kathleen, Ranger, Nabarlek and Yeelirrie; a number of other projects have yet to receive approval. ” Mr Anthony said that the ability of Peko and EZ to obtain these contracts confirmed his belief that there is a substantial market for and interest in Australian uranium. He mentioned that other negotiations were proceeding for the sale of Australian uranium, and that he expected several more contracts to be obtained over the coming months.
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POLICY June 1980
In (ii) and (iii), the Minister has available to him the advice of the Australian Uranium Export Office. This is not a Statutory Authority, but is encompassed within the Department of Trade and Resources. It was created not to market uranium - the responsibility of producers but to advise the Minister on commercial aspects of marketing, including the terms of conditions of individual contracts. In the negotiations between producers and utilities the Export Office is involved at two stages. First, companies are required to notify the Export Office that they are entering into negotiations with specific utilities; the Office advises the Minister; the Minister then gives a determination of the requirements to be reflected in negotiations. Second, once the companies have completed their negotiations, they submit the contract to the Export Office, and the Office advises the Minister whether the contract should be accepted or rejected. On 9 October 1979 Mr Anthony welcomed the announcement of the first contracts since December 1972, when the Labor government had refused to approve any new contracts. These new contracts were for uranium from the Ranger deposit, then under development. Electrolytic Zinc Company of Australasia Ltd and Peko Wallsend Operations Ltd had signed contracts for the sale, over the period 1983-92, of a total of 2 500 short tons of uranium concentrates to the Korea Electric Company. These contracts are worth, at current prices, a total of about A$160 million to A%180 million.” The Minister emphasized that deliveries under the contracts would be made pursuant to the terms of the bilateral safeguards agreement between Australia and South Korea which he signed on behalf of Australia on 2 May 1979. He explained that the safeguards
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Australian mineral commodity marketing
agreement was one of a network of such agreements being concluded with countries meeting Australia’s safeguards conditions and was to ensure that when Australia supplies uranium for peaceful purposes, it would not be diverted to non-peaceful or explosive uses. The Minister’s belief that there is a substantial market for, and interest in, Australian uranium is generally shared for the medium term. Although the demand for uranium will continue to grow in the foreseeable future, the market is seen as relatively weak for the next five to seven years, but it is expected to improve at the end of this decade and into the next decade unless major new low-cost deposits are discovered.12 Most utilities have contracts or inventories through to 1983 or 1985 and are in no immediate hurry to sign contracts although they recognize that new production will be needed by the late 198Os, even without new nuclear programmes. Australia is conscious of the fact that in current market circumstances uncontrolled high-volume Australian production entering the world market could cause the price to fall further. This could benefit Australian production by delaying higher-cost new producers in other countries, but a substantial price fall could lead to a renewal of an import embargo by the USA, leaving Australia and other non-USA producers with the residual market. What are the most likely markets for Australian uranium at present? The Republic of Korea is a customer because of its rapid economic expansion and need for increased electricity generation. The USA and West Germany are major markets, but a further expansion of nuclear capacity may be delayed until their impending elections are over. France and the UK have positive programmes, and many other European combines have significant nuclear programmes. Japan is committed to increasing its nuclear-generating capacity; Mr Amaya, in his Sydney address referred to above, suggested a Japanese nuclear capacity of 53 million kW by 1990.
Upgrading of resources before export In common with many other raw material producers, Australia wants to increase the degree to which resources are processed before export. This would increase both earnings and domestic income and employment. However, customer countries often also want processing facilities, because this reduces their import bill and raises their domestic income and employment. Any aspirations of Australia to increase processing facilities is therefore subject to a market constraint. Refusal by Australia to sell raw materials can be met by customers switching to other suppliers; attempts by Australia to offer both processed and raw materials can be met by the imposition of tariffs or quantitative restrictions in customer countries. A number of factors may operate against customer resistance: 0
0 ‘*See
174
Hampson, op cif, Ref 9, for details.
Environmental pollution from processing may be such that customer countries may be happy to export this. It was thought some years ago, when environmental consciousness became the vogue in Europe and Japan, that this would create economic opportunities for Australia; it was subsequently discovered that in most instances overseas countries placed income and employment before environment. Large-scale plants in Australia supplying several countries can offer economies of scale to offset tariffs.
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POLICY June 1980
Australian mineral commodity marketing
0
e
“The Deputy Prime Minister and Minister for Trade and Resources, the Rt Hon J.D. Anthony, announced on 8 November 1979 that the government was inviting the states to reexamine possible demand for electricity, and to submit new proposals for additional coalfor electricity projects based consideration under the Loan Council infrastructure financing guidelines. The previous year the Commonwealth had also supported a number of proposals from the states for special additions to their borrowing programme for electricity supply projects. I4 In Januan/ 1980, a joint statement by Mr Anthony. Minister for Trade and Resources, and Senator the Hon J.L. Carrick, Minister for National Development and Energy, listed the following as the aspects to be considered before final commitment was made: appropriate technology; environment factors: nuclear non-proliferation and safeguards: the choice of overseas partners: the possibility of multinational participation and what arrangements might yield the most commercially competitive Australian industry.
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POLICY June 1980
Processed materials, being reduced in volume, can be cheaper to handle, although this can be offset by different modes of handling, or where freight costs are related, in some sense, to value. In the somewhat special case of uranium, part-processing (or conversion of yellowcake to UF,) creates more material, so there are more cylinders for transport; some A$2-3/lb is gained for conversion, but transport costs rise. For enriched uranium there is a reduction in transport costs. Australia has large resources of coal, and can produce relatively cheap energy. This makes it an attractive processing location for energy-intensive processing industries such as aluminium smelting and uranium enrichment.13
As noted above, a number of aluminium smelter proposals are either under study or are being implemented. Uranium enrichment is also under serious consideration. In January 1979 it was announced that the federal government is studying the economic feasibility of establishing a uranium enrichment industry. In January 1980 the government announced that as part of this process, four Australian companies (BHP, CSR, Peko-Wallsend, and Western Mining) had agreed to establish a joint venture (the Uranium Enrichment Group of Australia) to undertake a prefeasibility study on the possibility of establishing commercial uranium enrichment in Australia. The government has also had discussions with the governments of France, Japan, and the USA and with Urenco/Centec on the availability of enrichment technology.14 Market constraints for enriched uranium in the shorter term appear severe, but since it would take some years for an Australian plant to be operating the constraints may be more imagined than real. World enrichment capacity certainly seems adequate until at least 1990, and the Three Mile Island incident, and presidential elections in the USA and West Germany, may have caused this to slip further, so that perhaps 1993-95, would be the period to be contemplating coming on-stream. New plants, however, will face special difficulties in competing with established plants which are amortized. Australia has suggested that to ensure a market for enriched uranium new export contracts for uranium should include a clause requiring the customer to take a certain proportion in enriched form if this is available; since this does not fit the traditional pattern of purchasing in this industry - where uranium supplies and enrichment are contracted separately - there is likely to be customer resistance. Australia’s ability to force its customers into using its enrichment capacity would depend on its market power as a supplier of the raw material as well as on the competitiveness of its price for enriched uranium. The Australian government has available a number of policies which it can use to encourage further processing, but perhaps the most effective is to negotiate with other countries prolonged access for processed products, thus lessening the risk in private capital expenditure. For instance, at the Australian-South Korean discussions mentioned above, both delegations agreed to examine the possibility of increasing the level of raw materials processing in Australia to the mutual benefit of both countries, and they established a joint study group of South Korean and Australian officials. One of the reasons why prospective Australian processors would
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I6Part
176
A: Basic Iron and Steel Products.
appreciate guaranteed access to markets is that in most cases the Australian market is small relative to processing plants of economic scale. In the case of steel, however, the industry in Australia has to date existed to supply the Australian market, with exports being ancillary. For the past decade Australia’s monopoly steel producer, BHP, has exported on average around 25% of its iron and steel output, with the annual figure sometimes as high as 40% and never below 12%. These are high, by international steel industry standards, and may be explained by the company’s policy of installing plant of larger capacity than is warranted by the domestic market at the time, so that it can enjoy economies of scale. The highly volatile international market for steel means export sales as an adjunct to a domestic baseload may be feasible, but a large new plant based on export sales would be a different proposition. A feasibility study for a jumbo steelworks was made during the 1970s by an international consortium (with European, Japanese, North American, and Australian participants), but it was not considered economic at that time; the overseas participants were steel producers who would have taken the semi-finished steel to process in their own countries. The Commonwealth government’s Industries Assistance Commsision has after some years of enquiry produced its Draft Report on the Iron and Steel Industry. l5 The majority report suggests that Australia should undertake a major expansion of capacity based principally on export markets, and to this end suggests that the government should make export subsidies available - despite the fact that direct export subsidies are not well regarded internationally and could cause market disadvantages for the Australian product. Furthermore the level of subsidy suggested, although perhaps significant in absolute terms, was small relative to the level of investment required, and less effective an incentive to the end the Commission had in view than eg accelerated depreciation allowances. Fiscal incentives, such as accelerated depreciation and special investment allowances are but one type of direct federal government measures to facilitate processing. Provision of infrastructure, or of low-interest loans for state government-constructed or privatelyconstructed infrastructure, are another. In some cases a review of shipping arrangements may be necessary; eg trial shipping on a regular basis between Australia and South America and between Australia and the west coast of Africa began as a result of an enquiry by a government committee. In the Australia-South Korea discussions mentioned above, delegations agreed that a regular joint shipping service between the two countries should be inaugurated, although their action at that time had to be limited to agreeing ‘to encourage their respective shipping companies to continue their discussions’. The state governments also can assist processing by charging a lower royalty on minerals which are processed locally (this is already done in some cases). They can also revise their rail freights for processed products, and their power charges. The individual states and Commonwealth together can facilitate development by making clear in advance where, to what degree, and on what conditions the environmental pollution hazards from processing will be tolerated. At present, for instance, South Australia, Queensland, Western Australia, and, to a lesser degree, the Northern Territory, all appear interested in having a uranium enrichment plant located within their state -but selection and approval of a specific site would be a very lengthy process.
RESOURCES
POLICY June 1980
Australian mineral commodity marketing
Future of long-term contracts with Japan In Australia’s mineral development of the 196Os, for which the engine was Japan’s rapidly expanding need for industrial raw materials, both Japan and Australia were quick to appreciate the price stability and market access guaranteed by long-term contracts, not to mention the security they conveyed for the capital to be invested in Australian mines and Japanese industrial plants. The practice of writing long-term contracts has been extended to other countries and other bilateral relationships. The 1970s were, in general, a difficult period in world trade and put pressure on long-term contracts in the resources trade between Australia and its major customer, Japan. Inflation and currency instability caused problems where prices were fixed (or revised with a pricing formula) and recession meant difficulties for Japan in accepting the tonnages contracted. In many cases problems have been solved through mutual understanding and goodwill, but (as discussed above in the section on export control) in others there has been the feeling on the Australian side that the Japanese have taken unfair advantage of specific situations by enforcing not only tonnage but price reductions. There has quite probably, at different times, been a similar feeling on the Japanese side. The Australia-Japan Business Co-operation Committee, meeting at Osaka in September 1978, had presented to it a paper on ‘Longterm contracts in the Australian-Japan trade’. The paper was prepared on behalf of the Committee by a working group of six member companies, each with experience in long-term contracts with Japan; their research extended beyond that group. The paper suggested, inter alia, that if new projects necessary to Japanese and Australian development are to be ‘successfully launched and sustained’ in the 198Os, then confidence in long-term contracts has to be strengthened. The following terms for existing mining projects and contracts were suggested: 0 0 0
these long-term contracts should run their whole term; disputes should be resolved by (a) mutual agreement, or (b) pursuant to the specific terms of the contracts; neither side should seek to impose unilaterally a change in contract terms contrary to contractual provisions.
For new contracts 0 0
0 0 0 For
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POLICY June 1980
relating to existing projects, it was suggested that:
Pricing reviews may be desirable at intervals of not less than two years. If buyer and seller cannot agree on a price or pricing formula, then it should be the seller’s option whether the contract should be terminated with some notice, or whether the existing pricing arrangements should continue. Contract tonnages should be realistic, with limited scope for adjustment. Prices might be denominated in a basket of currencies, to take account of currency instability. A proportion of some long-term contract sales could be on a cif or caf basis. new projects,
the paper
suggests
that for security
of those
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lending, long-term contracts It is further suggested that: 0 0
0
“The paper makes the point elsewhere that ‘Japanese people often tend to think it unreasonable to insist upon legal rights where changing circumstances make a valid contract unduly burdensome to either party. This does not deny a recognition that the law still applies, only that there should be a waiver of rights’. Susan Bambrick holds the degrees of BEcon and PhD and lectures in Resource Economics and Industrial Organization at the ANU. She has directed courses for the Australian Mineral Foundation, and consultant for both worked as a government and industry. She is a Fellow of the Australian Institute of Energy, and a member of its federal Council, and is also a member of the Commonwealth Government’s Uranium Advisory Council and Trade Development Council. Her most recent book is ‘Australian Minerals and Energy Policy: ANU Press, Canberra, 1979.
178
have to be firm and legally enforceable.16
(i) Quantities should be fixed leaving only minimal flexibility possible. (ii) Where price reviews are considered appropriate, if mutual agreement cannot be reached, then the price or pricing formula in the contract should remain. (iii) Since the provisions of (ii) may be arduous for the buyer because of changing commercial circumstances, then Japan might establish an import credit guarantee insurance scheme, or else compensate the seller where the buyer cannot take his contractual tonnages.
At the October 1979 meeting of the Committee in Melbourne a paper on long-term contracts in Japan-Australia trade, prepared by the Japanese member companies, was presented. It suggested that longterm contracts in the 1980s ‘should be based on the fundamental understanding of the need for coping with the changing business environment, and should incorporate specific contractual provisions enabling the parties concerned to implement the concept in practice’. It also drew attention to existing long-term contracts which ‘guarantee the intake of quantity having no correspondence to the level of price’, and said that in future it will be necessary to link price and quantity in some way. It recognized specifically that ‘the future long-term contract of new development projects requires to be a bankable one so as to provide some guarantee on quantity, price and term’. How that sentiment is put into practice remains to be seen.
Prospect Long-term contracts will remain important in Australia’s export trade in energy (coal, gas, and uranium) and in iron ore, bauxite, and nickel. As long as the present federal government remains in power, these contracts should be negotiated by private enterprise, perhaps within guidelines laid down by the government, and certainly subject to final approval by the government. The government’s attitude will be conditioned, in part, by market forces.
RESOURCES
POLICY
June 1980