High wages put $200 billion at risk

Projects could be cancelled or delayed as costs rise

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published October 29, 2012 2:24 pm AEDT

It seems Australia has a choice, lower wages and more mining projects or higher wages and higher unemployment.

The days of workers earning more than $100,000 a year driving mining trucks appears to be over, as resource companies focus on reducing wage expenses. The alternative is much worse – more projects cancelled and the prospect of rapidly rising unemployment.

WorleyParsons Limited (ASX: WOR) chief John Grill, has agreed with BP Australia's president, Paul Waterman, that high wage costs is putting major projects at risk. Speaking on the ABC's Inside Business program on Sunday, Mr Grill said that on average, Australian engineering wages were 50% higher than in many of the group's other offices around the world.

He also added that the high Australian dollar was making Australia uncompetitive – when the dollar was at 72 cents (against the greenback), Australia was definitely more competitive.

He also suggested that one of the difficulties in Australia, is that we've had a period of 25 years, where very little has been built, and very few people trained in the trades, like boiler-making, building, fitting and electrical. That has meant the company faces issues finding the number of skilled employees it needs, when it has a huge pipeline of projects ahead of it. Mr Grill also said that the company faces productivity issues, as it hasn't had the time to train its inexperienced people.

BHP Billiton (ASX: BHP) chief Marius Kloppers warned last week that Australia risks missing the boat on the next generation of mining investment – and the benefits that would flow from it. Mr Kloppers also raised the issue of rising costs, suggesting that miners would need to increase productivity and cut costs to remain competitive in a lower demand environment. Massive supplies of iron ore, in particular, are coming on stream in the next few years, which could lead to lower prices, and putting additional pressure on smaller iron ore producers. Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group (ASX: FMG) have also recently turned about-face, canning new projects & expansion plans while focusing on cutting costs.

Low productivity is one of the main issues identified in the Federal government's recent white paper. Solutions include skills training, higher education levels, further innovation, more spending on infrastructure and tax and regulatory reforms. As an example of infrastructure, Mr Grill noted that mainland America has oil and gas pipelines going everywhere, which made it very easy for new energy projects to get their products into the system, and hence was a very cheap source of energy for them.

The Foolish bottom line

Reducing costs, including employee wages is likely to become a major focus of resources and energy companies in the near future – if not already.

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