--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Dec 3 Australia's new
Liberal government is discovering that it's easier to promise to
be business friendly and welcoming to foreign investment than it
is to deliver in practice.
Prime Minister Tony Abbott vowed that Australia, the world's
top iron ore and coal exporter and soon to be the No.1 in
overseas liquefied natural gas sales, was "open for business" in
a triumphant election night speech in September after his party
vanquished the former Labor Party-led government.
What Abbott was trying to do was draw a line underneath the
policies of the Labor government, whose mining and carbon taxes,
coupled with increasing red and green tape, had been viewed as
hurting investment in the country's key resource sector.
However, in its first major test of openness, the Liberal
government decided to veto the A$2.8 billion ($2.6 billion)
takeover of GrainCorp by U.S. agribusiness Archer
Daniel Midland (ADM).
In rejecting the deal, Treasurer Joe Hockey cited farmers'
concerns about lack of competition if ADM was allowed to take
control of GrainCorp, which handles about of a third of the
wheat exports from the world's No.2 shipper of the grain.
Certainly, ADM would have gained a strong foothold in the
sector, but the fact is that any competition concerns already
apply to the existing GrainCorp dominance, given it handles 85
percent of wheat from the east coast.
It's possible that it was more important for Abbott and
Hockey to appease the government's junior coalition partners,
the Nationals, a rural-based party that campaigns on getting
better deals for farmers.
Whatever the reasoning, the risk is in the message being
sent: that Australia isn't as open for business as was promised.
The GrainCorp rejection also brought a rare public rebuke
from the U.S. State Department, which along with expressing
disappointment also noted that the United States is the largest
foreign direct investor in Australia.
If the GrainCorp decision was difficult, the new government
faces another tricky call involving a Chinese company, with the
accompanying risk of annoying Australia's largest trading
Yanzhou Coal Mining Co wants to buy out the 22
percent of its Australia unit Yancoal Australia that it
doesn't already own and take the company private.
Yancoal was listed on the Australian stock exchange in June
2012 after a merger with Australia's Gloucester Coal.
But there are a number of issues to sort out first, such as
undertakings by Yanzhou when it paid A$3.5 billion for Felix
Resources in 2009 and later merged those assets with Gloucester
Coal last year.
These included running the unit as an Australian company and
selling its stake down to less than 70 percent by the end of
Any change to these conditions will require the approval of
Australia's Foreign Investment Review Board, whose
recommendations are subject to the government's final say.
Another complicating factor is that Singapore-listed Noble
Group, which holds 13 percent of Yancoal Australia, is
believed to want more than Yanzhou is prepared to pay.
In theory, a decision will have to made by the end of this
month on whether Yanzhou can go ahead and privatise Yancoal, but
time is running out for all parties to reach a compromise,
meaning the government may be forced to grant an extension to
Yanzhou, or make another controversial call.
CLIVE PALMER HEADACHE
Another headache for Abbott and Hockey is the legal stoush
between China's CITIC Pacific and maverick Australian
mining billionaire Clive Palmer over royalty payments at the $8
billion Sino Iron project in Western Australia state.
While the delayed and over-cost project started loading its
first iron ore cargo this week, it's under a cloud as Palmer
claims he is owed hundreds of millions of dollars in
The complicating factor is that Palmer won a narrow victory
against Abbott's party in the Queensland electorate of Fairfax
in the September general election and is now a member of the
House of Representatives, the lower chamber of federal
Worse from Abbott's perspective is that Palmer's eponymous
Palmer United Party will have at least two seats in the upper
house Senate, and possibly a third once the disputed Senate
election in Western Australia is sorted out.
This gives him a realistic opportunity to either support or
block Abbott's agenda, including the business and investment
friendly policies to scrap the mining and carbon taxes.
Even if Abbott does manage to scrap the taxes, it's still
not certain this will be enough to arrest the problems that
Australia's resource sector is facing.
Rio Tinto's decision to shut the alumina refinery
at Gove in the Northern Territory, while keeping the
accompanying bauxite mine open, is a case in point.
Rio blamed the low alumina price and the high Australian
dollar for the refinery's losses, saying that keeping it open
was no longer viable.
But the bauxite mine is obviously still viable and it's here
that Australia faces its biggest dilemma.
Digging things up and shipping them overseas is still
profitable, as can be seen by the massive iron ore projects
being run by Rio and BHP Billiton, among others.
But adding value to the raw ores and oils is tougher, as
evident from Rio's Gove refinery decision, the closure of Norsk
Hydro's aluminium smelter north of Sydney and the idling of oil
And it's not just the resource sector where beneficiation is
difficult in Australia. Ford has announced it will close its two
auto plants in the country in 2016 and there is increasing
possibility that General Motors will follow suit.
The high Australian dollar is largely beyond the control of
the government, but high energy costs, taxes, wages and slowing
productivity growth are areas that it can tackle.
But these require tough choices from politicians generally
more focused on maintaining popularity in opinion polls.
The former Labor government tried to buy voter support by
imposing taxes on the resource sector and industry and using the
proceeds to boost welfare.
It didn't work as the taxes didn't raise the expected
revenue as commodity prices moderated, while the uncertainty
crimped investment and jobs growth.
Abbott has promised to reverse these policies, and he may
succeed in cutting taxes, but reducing the cost of labour, even
if done through measures to boost productivity, means a fight
with the unions, something a first-term prime minister may be
reluctant to take on.