Olympic Dam dreams and nightmares

The Olympic Dam expansion dream turned into a nightmare. The prospect of a four kilometre long and one kilometre deep open pit mine captured the imagination. It was going to take years to remove the overburden hiding the precious minerals in what was to become the largest mine in the world.

Hopes were high that the BHP Billiton Board would give the Olympic Dam expansion the green light. Those hopes were dashed. The disappointment was palpable across the state. Premier Jay Weatherill was quick to acknowledge the sombre mood, putting BHP Billiton on notice that community and industry concerns about the costs of not proceeding would need to be taken into account in future negotiations.

The stakes were high. The $20 billion project would have generated more than 10,000 jobs in the early phases of development, providing a significant boost to the state’s ailing construction sector and creating opportunities for well-positioned engineering, manufacturing and service companies. Mining royalties would have risen significantly once the mine was operational.

So what went wrong? Quite a few things really but the first thing to say is that it was a more precarious project than most people appreciated. The benefits of the expansion were talked up so much that the prospect of it not proceeding seemed unimaginable – such was the allure of its transformational economic potential for South Australia. While BHP Billiton didn’t make any promises about it proceeding it also didn’t hose down expectations. It wasn’t alone. Collective boosterism raised hopes to giddy heights.

Was the project scuttled by the carbon tax or the mining tax? Did the South Australian and Australian Governments do enough to secure it? A resounding ‘no’ to both questions. Announcing a sharp fall in profitability, BHP Billiton CEO Marius Kloppers made it clear that it was “subdued commodity prices and higher capital costs…that had led to the decision”. The Leader of the Opposition in South Australia, Isobel Redmond declared that the mining and carbon taxes were the cause. The State and National Governments had blundered she claimed, resulting in a disaster equivalent to the collapse of the State Bank. Tony Abbott agreed. BHP Billiton Senior Executive, Andrew Mackenzie said otherwise. He was full of praise for the South Australian Government. They “have been fully supportive of Olympic Dam” and have “created an environment that is highly conducive to business development and the Olympic Dam expansion project”, he said.

BHP Billiton’s decision on the expansion of Olympic Dam has its roots in the Global Financial Crisis, which has placed downward pressure on unsustainably high commodity prices. All of this is a reminder that mining booms invariably falter in the face of global economic crises. The millions of tonnes of minerals that lay deep underground at Olympic Dam are not going to go away, however. BHP Billiton knows this and they will wait for the right time to exploit the rich deposits that are available to them.

With declining (but still very high) commodity prices, the costs of removing billions of tonnes of overburden at Olympic Dam become less attractive to the profit hungry mining giant. Finding solutions to getting the minerals out more efficiently is now the priority. The expansion plan won’t go ahead as planned but it will go ahead in some form. Rising commodity prices in a post GFC environment where India and China resume strong growth might breathe new life into expansion of Olympic Dam, but relying on that is not likely to ensure that the expansion proceeds in any substantial way. In the meantime Olympic Dam will continue to be one of South Australia’s major mines, employing over 2500 people. One question I can’t help asking myself is why didn’t BHP Billiton have a ‘Plan B’ in place for expansion of the mine, one that didn’t rely so much on high commodity prices to drive profitability? Like many others they probably underestimated that enduring tendency within capitalist economies for sharply rising prices to fall. Commodity prices may have fallen but mining companies still enjoy exceptional profitability levels and the prospect of relatively high prices for years to come.

Will the BHP Billiton decision lead to terminal decline in the South Australian economy as the South Australian Opposition Leader claimed? Unlike Western Australia and Queensland, South Australia is not a mining state. It has experienced an exploration boom but not a mining boom. Most of its jobs are in the manufacturing and service sectors. Mining employment represents a little over one percent of total employment. The sector is a major generator of exports, rising and then falling on the back of fluctuating commodity prices. South Australia is not dependent on mining and is therefore less vulnerable during difficult times like these to the destabilising impact of a sharp decline in demand for minerals.

While the GFC continues to make life difficult for sections of the Australian and South Australian economy, unemployment remains low by international and historical standards. The next few years are looking tougher though. A few hundred jobs have been lost at BHP Billiton as a consequence of its decision and South Australian job growth will be significantly slower in the absence of the Olympic Dam mine expansion. This is not the end of the story, however. It is not a question of if the expansion will proceed, but rather when and in what form. All of this will be determined by commodity prices, the ongoing impact of the GFC and technological considerations about how to mine more efficiently at Olympic Dam.

The sliver lining in the dark cloud that was BHP Billiton’s decision to defer expansion, is that the South Australian community now has an opportunity to get a better deal from the project. We might also be able to avoid some of the negative consequences of a rapidly expanding mining sector including damaging inflationary impacts and crowding out of other economic activity in the non-mining sector.

The industry participation provisions included in the Olympic Dam Indenture legislation are far from world’s best practice. They have no teeth, merely requiring BHP Billiton to report on local industry participation rather than mandating targets and putting in place policies and processes that seek to maximise local employment and industry content. Norway is the benchmark for tackling this. It has put in place local content targets underpinned by a strategy to substantially increase workforce and industrial capability to deliver goods and services to the mining sector. Joint ventures to strengthen the mining supply chain have been supported along with industry clusters to help foster beneficial collaborations and innovation.

The South Australian Government has an opportunity to revisit how it can maximise the benefits of mining for more South Australians. I suggest it look closely at the Norwegian model and to the more substantial commitments that BHP Billiton have made to local supplier capacity and capability development in countries like Chile.

So it not a question of if but when the expansion of Olympic Dam will take place. BIS Shrapnel Chief Economist, Dr Frank Gelber, expects work to begin around the middle of the decade and has factored it into his latest economic forecasts. He is probably right. This is a window of opportunity to renegotiate the terms of our engagement with the project, to ensure that the benefits are maximised and negative impacts avoided.

Associate Professor John Spoehr is the Executive Director of the Australian Workplace Innovation and Social Research Centre at the University of Adelaide