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Bleak warning of impact of Australian foreign investment reforms on mining

Proposed changes to Australian foreign investment rules are already affecting Chinese investor interest in the resources sector, which is "carrying" the country's economy that is only at the start of the commodity price cycle, Edward Rigg, chairman and head of corporate finance of investment house Argonaut, told delegates at a recent conference.

The reforms, proposed in March, will give Australia's Foreign Investment Review Board new powers to approve investments in what the government defines as a "sensitive national security business."

Rigg told the RIU Resurgence Conference in Perth, Australia, on Sept. 15 that the mining sector, in particular iron ore and gold, is the main reason Western Australia's government will be able to announce a budget surplus for fiscal 2020 despite stimulus measures to prop up the economy during COVID-19.

Western Australia recorded the strongest economic growth of any state in the country during fiscal 2020 at 1.1%, which is underpinned by 9.3% business investment growth, in which the resources sector played a critical role, according to Rigg.

Argonaut believes that the commodity price cycle is "at the start of a strong uplift," given that the U.S. Federal Reserve only restarted quantitative easing in March, after most commodity prices rose between 100% and 300% in the two years of quantitative easing following the global financial crisis of 2008 and 2009.

Most commodities have already risen by between 20% and 30% since March, with silver rising even higher, Rigg said.

Meanwhile, exploration costs per meter are increasing in Australia, indicating rising utilization, which will require more migration of workers into the state, Rigg said.

Gold comprises 51% of exploration spending and iron ore comprises 23%, yet maintenance costs are much higher than new capital spending, suggesting that "we've got a fair while to go" in the current commodity cycle, Rigg said.

Against this backdrop, Rigg said Australian Treasurer Josh Frydenberg's proposal of new foreign investment laws in March was "short-sighted, populist, and designed to win votes, not for the benefit of Australian households."

Rigg noted that China accounts for more than half of global demand for metallurgical coal, bauxite/alumina, iron ore and nickel, 48% of copper demand and 46% of lithium demand.

Lithium and copper are particularly important to Australia, Rigg said, adding that the country's global exports of those commodities were worth A$3.3 billion in fiscal 2019.

National security concerns

Rigg cited the Australian government's Productivity Commission, which said blocked or discouraged foreign investment would hit household incomes in Australia and foreign investment's role would be "more crucial than ever" in helping the economy recover from COVID-19.

The commission also said in a June paper about the proposed investment reforms that "national security concerns have received greater prominence due to the rising share of our inward investment being sourced from China."

"For the first time, one of our largest investors is not a democracy or a military ally," the commission added.

The commission also criticized the federal government for its low level of transparency around processing investment applications, even those with "no national security dimensions."

Security sensitivities notwithstanding, Rigg asked, "Why would you treat your main customer [China] the way [Australia's government officials] are treating them" given the nation's investment needs.

Mining accounted for 21% of the A$49.3 billion of investment that 361 Chinese investment projects made in Australia from 2014 to 2019. "Capital is mobile, and it goes where it's made welcome," Rigg said, citing figures from Australian National University's Chinese Investment in Australia database released Sept. 14 showing that investment fell from A$4.8 billion in 2018 to A$2.5 billion in 2019.

Rigg's warnings follow calls by Australia's lithium industry that the government treat it as a "special case" due to the challenges it faces amid low commodity prices.