Glencore chief executive Gary Nagle is playing brinkmanship with the Albanese government over his loss-making copper processing in Mount Isa and Townsville, using the first sitting of the new parliament to exert maximum pressure.
Nagle has sensed Anthony Albanese’s vulnerability around his much-championed Future Made in Australia strategy.
But the Prime Minister’s vision of a critical minerals nirvana is increasingly butting up against the reality of a fleet of old and small smelters and refineries across the country that are struggling to compete with the low-cost-scale producers in Asia (particularly China).
Where copper remains the hot commodity and is pushing $US10,000 a ton, smelting is a high-cost game where surging energy prices and chemical processing costs have cut into margins.
In other words, it’s more profitable to dig unrefined copper and ship it somewhere else to be processed. That’s what the Swiss-based Glencore wants to do.
Nagle’s demands for a government bailout (including the Queensland government) should be unsurprising.
The Albanese government set the tone this year when it effectively offered a blank cheque for the bailout of the seriously challenged Whyalla Steelworks.
In this case it was the South Australian government, a minor creditor, that tipped Sanjeev Gupta’s operations into administration but left Canberra to pick up the bill that could run into the billions of dollars.
Right on cue, Canberra committed another $275m to Whyalla on Wednesday to support its administration, just as Glencore issued its warning over the future of its Queensland business.
It’s significant that he’s calling for the government to take an equity stake, suggesting Glencore views the problem as structural rather than cyclical.
The underwriting of Whyalla shows the need for a more structured framework over industry bailouts.
After all, Glencore’s operations are arguably more critical than the long steel produced by Whyalla.
Long steel is by no means in short supply, with US President Donald Trump’s tariffs now adding to a global glut.
Shutdowns
The clouds now hanging over Glencore’s smelting and refining operations aren’t empty threats from Nagle.
He’s been busy closing Glencore’s smelters around the world to focus on higher-margin mining. Last year, he shut Italy’s only remaining copper and zinc smelter, and has put the South African government on notice he plans to close his nickel smelters there unless a deal can be done.
“We will not run operations that are not cash generative and are not profitable,” Nagle told investors this year.
Glencore says on current projections, the Mount Isa smelter and Townsville refinery were projected to lose $2.2bn over the next seven years.
BHP’s highly regarded former chief economist Huw McKay this week wrote of the risk that as more rescue packages are doled out on a case-by-case basis there’s a risk the processing facilities become “long-term wards of the state, with no clear route to durable international competitiveness”.
McKay, who is currently a Visiting Fellow at ANU’s Crawford School of Public Policy, proposes a narrow focus on “strategic” minerals for processing due to their link to defence uses. This is different from “critical” minerals that still largely flow easily through global markets.
He argues that any taxpayer funds should be tied to extracting “strategic products” in the processing such as gallium, germanium and antimony.
Remember, China slapped an effective export ban on these three elements that have significant military applications.
“Business-as-usual bailouts without a strategic metals overlay, whereby the government backstops an entity until such time as commercial financing becomes available, are likely to be a waste of money and time,” McKay said.
His comments follow BHP last year mothballing its nickel West Australian nickel processing operations given the supply flooding the market mostly from Indonesian processors.
“The current challenges confronting downstream processing in the Western world are not short-term, and definitive action is required if this segment of the value chain is to thrive in the future,” McKay said.
“If we wish to convert our remaining processing operations from financial liabilities into strategic assets, then the way forward is clear.”
APRA’s weights
As the brightest minds in Canberra attempt to tackle Australia’s lagging productivity, one of the many weights on the economy surely has to be sheeted back to bank regulator APRA.
In its latest six-monthly review of credit speed limits, APRA chairman John Lonsdale continues to show zero appetite to adapt flexible settings to a slowing economy.
APRA continues to insist on having unusually high hurdles for borrowers to qualify for a loan. Even as the Reserve Bank attempts to loosen the credit tap through the economy, APRA wants to keep it tight. And as we’ve called out before, this punishes first home buyers the most.
The bank regulator is holding the “serviceability buffer” at 3 per cent. It lifted it to these levels coming out of the Covid pandemic when interest rates were near zero and credit was running hot. Nearly four years later, housing finance is starting to stall, particularly to first home buyers. Housing approvals are barely lukewarm and the pace of the economy is underwhelming.
APRA’s narrow mandate means it doesn’t really have to consider a big picture view of the economy. It just needs to be sure the banks it regulates aren’t going to get into trouble. However, APRA’s base case is around removing all risk out of bank lending, before banks can make the call, and this is putting a dampener on the animal spirits that productive economies crave.
Current headline standard variable mortgage rates are around 5.85 per cent. A new borrower would be stress tested as though bank interest rates were sitting at 8.85 per cent. It was late in 2021 when APRA hiked the buffer to 3 per cent from 2.5 per cent.
In mid-2022, it tightened the screws further on first home buyers, making it explicit to banks to also factor higher education debts like HECS in the debt-to-loan calculations.
The alarmism around the so-called mortgage cliff coming out of the Covid pandemic, around fears that borrowers would blow up in bulk as they rolled off low fixed-rate mortgages, never eventuated. Indeed, bank mortgage arrears kept falling to record lows in the past two years, even as the cash rate kept moving higher. The reason? Employment levels remained robust.
APRA cited rising interest rates and higher unemployment as motivation to push up the serviceability buffer. In keeping the buffers high, it is now worried about interest rates falling, which the regular says could fuel risky lending.
This is now an economy moving to a place of business as usual, there’s no reason for APRA to keep the credit tap turned off.
BBB class
A snapshot of 100 corporate credit ratings across Australia and New Zealand tracked by S&P Global Ratings shows the most common ratings class here is the mid-tier “BBB”. The BBB level accounts for most of the ratings in building materials, media, energy and transport.
Significantly, real estate operators on average have the higher “A” rating that also accounts for the bulk of S&P’s ratings across pharmaceuticals, telecom and utilities. Still, the S&P snapshot shows Aussie corporates that issue debt are generally conservatively geared, with so-called investment grade issuers (BBB or higher) making up 86 per cent of ratings among Australian corporates.
There’s no commercial AAA borrowers, although Canberra-owned Airservices Australia is the only issuer with the rolled-gold rating, helped along by the Commonwealth government’s balance sheet. Miner Fortescue carries the non-investment grade BB+ rating and under pressure coal miner Coronado Mining has the lowest among Australian issuers with a CCC-plus. Each of the big four banks are rated AA-minus by S&P Global, sitting alongside just a handful of global banks to sit in the AA rating band.
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