Iron ore miners face cost blowout with wages rising in return to boom times

Boom times are back, commodity prices are on the up, amid early speculation of a new commodities super cycle.

Boom times are back, commodity prices are on the up, amid early speculation of a new commodities super cycle. Photographer: Carla Gottgens/Bloomberg

Fortescue Metals Group is unlikely to be an orphan in suffering a blowout in costs at its Iron Bridge magnetite mine in the Pilbara.

While the company is still running the numbers on ways to bring down the cash it spends directly on the project, talk of a 25 per cent increase in costs at the mine, which it owns with Baowu and Taiwan’s Formosa, may turn out to be the first of many in the WA industry.

Looking at the WA resources industry it is clear that boom times are back — commodity prices are on the up, amid early speculation the coronavirus pandemic may help spark a new commodities super cycle.

But that also comes with all of the problems of the last boom, as wages escalation and skills shortages loom large for the powerhouse resources sector in WA.

Industry sources say contractors have been complaining for months that poaching of skilled workers is again becoming rife. Workers are being offered 20 to 30 per cent wage rises to jump ship and are doing so with glee.

Iron ore miners and contractors are poaching truck drivers from gold miners, figuring a rise in the wages bill is a small price to pay to keep the tonnes flowing with iron ore prices above $US160 a tonne.

Without access to interstate labour markets, more junior miners are forced to poach workers from each other and from other industries at a premium, with the effects rippling quickly through the rest of the state’s economy.

WA’s agricultural sector struggled to get this year’s bumper harvest in due to a shortage of as many as 500 truck drivers, as the miners sought anyone with a heavy multi-class licence.

Sources say haulage companies are now offering sign-on bonuses of up to $5000, plus wages of up to 25 per cent above 2019 rates, simply to put bums on seats in trucks across the state.

Similarly, regional workshops are struggling to service heavy machinery because their mechanics have toddled off to work on the mines, which are still struggling to recruit experienced mechanics.

And, as in the boom years a decade ago, strange choke points have emerged because of shortages of workers in jobs you probably didn’t know existed.

As a case in point, haulage industry sources say the endless procession of heavy equipment up the state’s Great Northern Highway is being slowed by a ­serious shortage of escort wardens supplied by the Department of Main Roads, and pilot escorts from private providers, required for any load wider than 5.5m and/or longer than 40m.

Time is money when heavy construction modules, or other large equipment such as cranes, is destined for a construction site. Late arrivals push back the pace of other work, blowing out timelines and budgets.

And what if you’re trying to get a commercial electrical job done, or get skilled tradies in for building work at the smaller end? Good luck, because it’s getting more difficult by the month.

All of this is a familiar story to anyone who spent time around the WA mining sector in the boom years, as the mining and oil and gas industries pumped hundreds of billions of dollars into the economy to build massive infrastructure projects and sent prices in Perth skyrocketing for everything from housing rental to the price of a cup of coffee.

The reasons are slightly different this time, but the outcome looks like it will be the same.

In 2012 WA had $141.7bn worth of committed resource projects in the pipeline, according to the Bureau of Resource and Energy Economics. Its successor bureau, now in the Department of Industry, puts the current total at only $22.2bn. A small fraction of the peak years, granted, but a 16,148 per cent increase from the meagre $136.6m recorded in late 2016.

In any ordinary year that uplift would probably be sustainable, albeit with a few moments of panic along the way.

But the pandemic has changed everything.

The coronavirus has effectively ended mass international travel, and therefore the sector’s ability to source skilled and specialist labour from offshore.

And erratic but incessant interstate border walls, along with quarantine requirements for interstate travellers, have made it far more difficult to source workers from interstate.

On top of that, unlike the boom years in WA a decade ago, the eastern states are in the middle of an infrastructure frenzy of their own, and are likely to further ramp up spending on roads and railways and bridges and buildings in order to kickstart their own economies after the pandemic.

The big miners have been pretty successful in convincing their permanent workforce to relocate to WA for the medium term, at least until a vaccine is rolled out. The severe shortage of rental accommodation in Perth is crimping that now, but the shortages are not necessarily acute.

And this time round the biggest miners Rio, BHP and Fortescue, along with smaller peers, showed a little more foresight than in previous cycles, and have spent the last few years investing more heavily in apprenticeships and trainees, hoping to rebuild some of the worker loyalty that was lost when they were sacking workers by job lot in 2014 as commodity prices fell.

But the problems for those building mines are becoming more acute.

A construction workforce is short term, and over the last decade has traditionally been very mobile. That is one of the issues believed to be facing Fortescue, as its contractors were relying on Queensland-based workers for major sections of its projects, and borders are now (again) closed as construction ramps up.

But the issue runs far deeper than just the most recent border closures, even if they are causing chaos in the short term — not least because hundreds of permanent workers got caught on the wrong side of WA’s borders after visiting families in the east over Christmas, and have missed the start of new swings due to quarantine requirements. There’s also plenty of work in civil construction in the eastern states and the wage differential is not what it was a decade ago. If you have to quarantine for 14 days to take work in WA, why would you unless the wage is outrageous?

And even if you would, 14 days sitting in quarantine comes at a cost, both in wages and hotel bills — additional costs that would not have been part of the equation when budgets were done and contracts drawn up before the pandemic.

Industry sources say the situation has not yet hit crisis point, but it is only months away, with potential labour shortages of up to 20,000 people across the industry if a ceasefire isn’t called in the border lockdown wars.

What does all of this mean?

It is possible the government of Premier Mark McGowan may relax their hair-trigger responses to even the smallest of outbreaks in the east after the state’s March 13 election, easing the situation in the medium term. But if the frantic industry lobbying behind the scenes is not successful, the pressure on the sector will only grow,

So, if you’ve got a useful ticket and you’re already in WA, the boom times are back, baby.

But if you’re running a business in another industry it will only get tougher, as non-mining sectors are again hollowed out by the demands of the resources industry, as they were through the boom, as miners raid manufacturing workshops and regional workforces for staff.

It will cost more to mine a tonne of ore, across the sector.

Rio Tinto factored in a US50c escalation in the operating costs at its iron ore mines due to the pandemic, Fortescue US22c, and BHP direct COVID-related costs of $US130m across its operations. Those additional costs, and worse, are now likely to be baked in across the industry until the pandemic is over. But the good times are coming back for mining services suppliers, as the balance of power between miners and contractors swings back round again.

A few years ago even specialist contractors were complaining that the big miners were able to change the goalposts at a whim. Sign a fixed-price contract with Rio one month, and a few months later you’d have their contract managers back in the office demanding to see a detailed copy of your input costs, and wanting to know why you couldn’t shave another 15 per cent off the price.

Now even contractors with fixed-price contracts have a bit of leverage, and are able to point to the border closures they can’t control as a reason for delays and demand more cash to keep the same workforce in place.

Such is the competition for limited pools of labour that contractors, rather than lowballing tenders simply to get the work, are bidding up wages as they enter contracts simply to ensure they have the staff on hand to do the work if they are successful.

And Fortescue is unlikely to be alone in suffering a blowout at a major project.

Rio and BHP also have major mines under construction, and will not be immune to the same pressures facing their Pilbara rival. The plethora of smaller players in the gold, lithium and nickel sectors will be facing the same issues.

Investors in companies with projects in development, now salivating at the prospects of sending production into high commodity prices, will need to temper their expectations, as it will almost certainly cost more and take longer to get a new mine into production than they think.