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News.com.au
2 days ago
- Business
- News.com.au
Bulk Buys: Calls for Aussie green iron grow, but we're missing the crucial ingredient
Green iron has become a major talking point in Australian political circles But the biggest handbrake on the nation-building industry could, ironically, be Australia's raw materials Cyclone Metals is blazing a trail in the space at Canada's Iron Bear project Recent weeks has seen a re-emergence of a long-running debate in Australian mining and the political landscape around it. Do we continue to dig it and ship it, selling our iron ore and coal to China in a network that makes us the quarry for the world's dominant steelmaker? Or can we revive a long crippled manufacturing sector at home, saving the world from an industry responsible for 8% of global carbon emissions by becoming producers of green iron at home. One barracker, the Rod Sims chaired Superpower Institute, claimed in a report last week that we could turn the $120bn iron ore export industry into a $386bn green iron export sector by 2060. They've called for government intervention to make it happen. That includes a production tax credit to supplement a proposed credit designed to make green hydrogen production $2/kg or below, equivalent to a carbon price of $170/t. Other recommendations are to support shared infrastructure, a green hydrogen certification scheme, grants that can support 15% of capital cost on top of an already announced $1bn green iron investment fund, up to $500m for projects producing 0.5Mt of steel or more a year, and a host of more general recommendations to support global carbon pricing initiatives. Industry backers The push for domestic green iron has come from business quarters as well, notably Andrew Forrest and his iron ore giant Fortescue (ASX:FMG), which is building a 1500tpa pilot plant at its green energy hub at Christmas Creek, at the same time as it dials back investments in its much touted hydrogen division amid a backdrop of economic uncertainty. Forrest himself has laid out warnings that Australia's iron ore exports could be at risk of losing their crown as ore grades slide and high-grade African deposits like Simandou come online. It's a curious position given Fortescue' own iron ore, sans its Iron Bridge magnetite mine, is among the lower grade products on the market, with some variations. Lower grade iron ore can work in concert with higher grade products in the blast furnaces that dominate the steel market in China and emerging player India, since it is typically blended to reach an optimal blend for the steel mill, based on market prices for steel and various inputs including iron ore and coal. China has stated its intention to reduce emissions from the steel sector, regularly promoting capacity swaps that involve the retirement of older factories for newer ones with better emissions profiles. It has largely done that via the development of electric arc furnace plants that need scrap steel to operate. There are some limitations there – recycled steel isn't great for high-end products like cars or high-tech equipment, while blast furnace lives remain relatively young. The plants, which use coal as the reductant to convert iron ore into crude steel, will remain in operation for decades yet. The easiest way to reduce steel emissions in billion tonne a year producer China is therefore higher iron ore grades with lower impurities, which require less coal and energy to produce the same steel tonne. To really curb emissions you need a direct reduced iron plant, which tends to operate with natural gas as the reducing agent. Theoretically, this process could be emissions free if that gas can be swapped out for hydrogen, something which has been studied for a while in Europe. But there's a bigger limitation. Australia has great stores of natural gas and abundant wind and solar resources to power a hypothetical hydrogen production process. However, it's the very specific grade of iron ore needed to produce DRI steel that will be the blocker. Australian iron. ore producers ship hematite, which has a high (but in the Pilbara's case declining) grade in the ground. But it is magnetite concentrates, which need to be beneficiated to deliver higher grades with lower impurities to the market, that are key for DRI. "With abundant high-grade iron ore resources and processing facilities, countries like Brazil, Canada and Sweden are better positioned for this transition. If it wants to remain competitive, Australia must focus on developing its magnetite iron ore sector," IEEFA energy finance analyst Sorough Basirat warned. "Over the past two decades, several large-scale concentrate plants have been launched to supply high-grade feedstock, along with two smaller-scale pelletising operations. Despite significant investment, however, these projects have often been plagued by delays, budget blowouts and operational setbacks. "Australia must act swiftly to remain competitive. Green iron is more critical to Australia than to any other country, given that iron ore is its leading export and that the country is the world's largest iron ore exporter. "The clock is ticking for Australia. Major miners must accelerate their efforts and adopt viable solutions quickly, or Australia risks missing out on this once-in-a-generation opportunity." Global potential That doesn't mean there aren't already Australian companies waking up to these changing tides. Cyclone Metals (ASX:CLE) this year sewed up a deal for Brazil's Vale, producer of around 60% of the iron ore globally suitable for DRI steelmaking. In recent times DR pellets assessed by Fastmarkets have nabbed a premium of around US$50/t over the prevailing price of 65% Fe iron ore, which itself runs a premium to the commonly quoted 62% Fe price – the latter is currently US$95.80/t. Cyclone Metals owns the 16Bt Iron Bear magnetite complex in Canada's Labrador Trough, one of the few places known to produce magnetite of the purity required to have DRI potential. With Vale in line to spend US$138m proving it up for an eventual 75% stake, it's one of the few deposits on the ASX with genuine potential to join the ~125Mtpa market for DR grade iron ore. "We've got a resource and we've done variability test work, so we've got results which for all intents and purposes is the easiest resource to upgrade to the DR grade that we're aware of," Cyclone CEO Paul Berend said. "(Rio Tinto's) IOC has got something a bit similar and they're about 250km from us, but they're much, much smaller in size and Vale is able to make DR pellets from much lower grade material from their southern system." That is proprietary to Vale, something Berend says shows developing DR grade iron ore projects in Australia is not outside the realm of possibility. But Iron Bear's mineralogy has given the project a leg up. Unlike blast furnaces, where impurities are extracted and separated in a slag, DRI plants need extremely low silica levels in their feedstocks. "When you see a silica floating below 1.5% you're getting into the zone. The Fe grade of a pellet is around 66% because you add things into pellets, you add bentonite and other stuff, binders," Berend said. "The Fe grade goes down, but it's misleading. It's the concentrate that you need to look at. "And even if you do get a concentrate, which has Fe and the silica which are the two things that you need to worry about, you still have to be able to get to the compression strength and the porosity, which not all orebodies, and enable you to do." Still an opportunity That doesn't mean Australia can't join the movement towards DRI. "Australia has a challenge with the ores, but has a huge advantage in terms of energy costs. So that's a very interesting situation for us to be in," Berend said, noting that Australia like other locations that host DR plants like the Middle East has its own sources of natural gas and renewable energy. "And I would invest very heavily in processing because there's lots and lots of iron ore in Australia, people haven't looked at the magnetite deposits in the way they should. And I'm sure there's clean magnetite deposits out there that we could find." Magnetite ores with higher grades and lower impurities will save emissions in traditional blast furnaces as well, Berend noted. "There's a challenge here Australia because if we don't interact together we're going to miss the boat for the next generation of ores," he said. "People get distracted by this siren of let's try and do zero carbon steel. It makes no difference to the footprint for the planet of steelmaking. "We can do green steel in Western Australia, but it will still be a very marginal thing for the next century or 50 years. And whilst it's interesting and we should do it, the bigger picture is decarbonise the steel industry by having cleaner raw material baskets, cleaner coal, cleaner iron ore. Immediate impact." Cyclone and Vale recently completed phase 4 of the met testwork at Iron Bear, producing 2.3t of DR grade concentrate at 71% Fe and 1.2% silica with low deleterious elements, along with 3.5t of blast furnace concentrate and, critically, 260kg of direct reduction pellets grading 68.4% Fe and 1.5% silica. A scoping study is due by the end of June. Elsewhere across the ASX there are a host of other magnetite hopefuls. In WA Gina Rinehart's Hancock Prospecting is still working on studies into a deposit in the Pilbara known as Hardey and in the Yilgarn in a partnership with Hawthorn Resources (ASX:HAW) and Indian-backed Legacy Iron Ore (ASX:LCY). In South Australia Magnetite Mines (ASX:MGT) continues to hold the Razorback project near the long-running but clouded SIMEC Mining operation. In the Pilbara and Mid West are the long-established Sino Iron and Karara Mining operations, while in Tasmania, Grange Resources (ASX:GRR) operates the small Savage River mine, where an underground development to extend its life is in the works. Falling iron ore prices appear to have scuttle the Southdown development proposed by Grange in WA's Great Southern region, while in Hawsons Iron (ASX:HIO) continues to plug away in NSW. In Africa, AKORA Resources (ASX:AKO) is targeting the development of its 2Mtpa Bekisopa project in Madagascar, which unlike most magnetite projects can be upgraded to grades similar to the iron ore produced in WA's Pilbara with simple beneficiation. That means it can be developed as a low-cost DSO operation, costing just US$60.6m to establish and with capital payback in 1.8 years according to a recent PFS. FID is expected in mid-2026 with the first shipment due in Q3 2027 if all goes to plan. MD Paul Bibby said on the release of the March PFS that further drilling could confirm additional mine life beyond the initial 6 years, with the long-term vision of building a high-grade concentrate operation beyond the initial DSO project. According to assessments of the port capacity at Toliara, minimal upgrades would be needed to support Bekisopa's anticipated Stage 2 green steel iron concentrate product handling of a nominal 5Mtpa rate. What about coal? While iron ore prices have been relatively stable this year in the face of weak steel industry profits and macroeconomic uncertainty, coal has suffered dearly. Prices of US$187/t for the top-grade Queensland coking coal don't seem too bad until you factor in the much higher cost base for incumbent miners since the pandemic, and the fact most producers don't actually realise that benchmark price. Thermal coal is even more sold off, down at around US$103/t after a couple of mild northern winters. Experts don't think met coal prices, in particular can stay so far into the cost curve forever. Speaking to Stockhead last week, Precision Funds Management's Dermot Woods said it was just a matter of time before the market moved for its key pick in the space, Whitehaven Coal (ASX:WHC). " If you take how hard it is to get a project off the ground in any commodity and then multiply that by all the green tape around getting a coal asset up anymore," he said. " We're sort of bemused that people aren't willing to pay more of an option premium for something like Whitehaven, which is making OK money at the moment. "If you can compare and contrast to lithium, which also isn't working at the moment, but the price is going down and down and the coal price is level. " People are pricing in this coal price forever, whereas they're pricing severe mean reversion back to sort of US$12-1500 ... on lithium. " I don't think that the average person understands how much costs have gone up in the coal space or what the real all in sustaining costs are there. " I don't think there's a lot of people making much money in coal at the moment, so it's a matter of time to – and you never know when these prices happen – but until coal runs really hard."
The Advertiser
26-05-2025
- Business
- The Advertiser
Australia urged to spend big while green iron is hot
Australia has a unique opportunity to trade its dirty coal and gas industry for cleaner green iron market and make four times the revenue from its export by 2060, a study suggests. But there are hurdles to producing green iron in Australia, the report says, and government and businesses need to invest to beat rival nations racing to cash in on the opportunity. The Superpower Institute released the findings in its Green Iron Plan for Australia report on Monday, analysing potential restrictions and opportunities to establishing a local industry. The research comes three months after the government announced a $1 billion investment in green iron production, including $500 million to support existing and new developments. Green iron is produced using renewable energy resources such as hydrogen and electricity generated by the sun and wind rather than coal or gas, and has the potential to cut 90 per cent of emissions from the steelmaking process. Australia is considered a strong potential green iron producer as it is the world's biggest iron ore exporter, but the report identified three obstacles to its production. Early investors were not being given enough financial support, infrastructure to support its production was lacking, and the absence of an international carbon price made it hard to compete with fossil fuel-based iron, the report found. If these issues were addressed, Australia could have a clear pathway to producing green iron, cutting emissions and taking advantage of its natural resources, Superpower Institute chair Rod Sims said. "If anyone is going to make green iron, it's going to be Australia," he told AAP. "Every international study I've seen - and I've seen a few - says that if you want green iron, Australia is either one of the small number of top places or is the best place to do it." Introducing a green iron production tax credit of $170 per tonne could temporarily address the lack of a carbon price, the report found, while grants of up to 30 per cent could help to establish early green iron projects. Other recommendations include introducing a green hydrogen certification scheme and researching trade opportunities. Australia could generate up to $386 billion a year from green iron by 2060, the report found. Mr Sims said the nation should aim to have between two and four projects in operation by 2030. "Australia is the world's largest producer of gas and coal combined but they will go down as the world moves to net zero, therefore you need a foot in the other camp," he said. Small green iron plants are already planned in countries including Germany, Sweden and Namibia. Green iron projects in Australia include Fortescue's Christmas Creek project, expected to begin production before the end of 2025, and a $3.5 billion Gladstone project backed by Quinbrook Infrastructure Partners. Government commitments to green metals include $750 million from the Future Made in Australia fund and $500 million from the Green Iron Investment Fund. Productivity Assistant Minister Andrew Leigh said the government would seek to make strategic investments to help establish the industry. "No one thinks public investment is a substitute for private capital," he said. "There are moments, especially during structural transitions, when governments can play a useful role in reducing uncertainty, addressing market failures, and de-risking early stage ambition." Australia has a unique opportunity to trade its dirty coal and gas industry for cleaner green iron market and make four times the revenue from its export by 2060, a study suggests. But there are hurdles to producing green iron in Australia, the report says, and government and businesses need to invest to beat rival nations racing to cash in on the opportunity. The Superpower Institute released the findings in its Green Iron Plan for Australia report on Monday, analysing potential restrictions and opportunities to establishing a local industry. The research comes three months after the government announced a $1 billion investment in green iron production, including $500 million to support existing and new developments. Green iron is produced using renewable energy resources such as hydrogen and electricity generated by the sun and wind rather than coal or gas, and has the potential to cut 90 per cent of emissions from the steelmaking process. Australia is considered a strong potential green iron producer as it is the world's biggest iron ore exporter, but the report identified three obstacles to its production. Early investors were not being given enough financial support, infrastructure to support its production was lacking, and the absence of an international carbon price made it hard to compete with fossil fuel-based iron, the report found. If these issues were addressed, Australia could have a clear pathway to producing green iron, cutting emissions and taking advantage of its natural resources, Superpower Institute chair Rod Sims said. "If anyone is going to make green iron, it's going to be Australia," he told AAP. "Every international study I've seen - and I've seen a few - says that if you want green iron, Australia is either one of the small number of top places or is the best place to do it." Introducing a green iron production tax credit of $170 per tonne could temporarily address the lack of a carbon price, the report found, while grants of up to 30 per cent could help to establish early green iron projects. Other recommendations include introducing a green hydrogen certification scheme and researching trade opportunities. Australia could generate up to $386 billion a year from green iron by 2060, the report found. Mr Sims said the nation should aim to have between two and four projects in operation by 2030. "Australia is the world's largest producer of gas and coal combined but they will go down as the world moves to net zero, therefore you need a foot in the other camp," he said. Small green iron plants are already planned in countries including Germany, Sweden and Namibia. Green iron projects in Australia include Fortescue's Christmas Creek project, expected to begin production before the end of 2025, and a $3.5 billion Gladstone project backed by Quinbrook Infrastructure Partners. Government commitments to green metals include $750 million from the Future Made in Australia fund and $500 million from the Green Iron Investment Fund. Productivity Assistant Minister Andrew Leigh said the government would seek to make strategic investments to help establish the industry. "No one thinks public investment is a substitute for private capital," he said. "There are moments, especially during structural transitions, when governments can play a useful role in reducing uncertainty, addressing market failures, and de-risking early stage ambition." Australia has a unique opportunity to trade its dirty coal and gas industry for cleaner green iron market and make four times the revenue from its export by 2060, a study suggests. But there are hurdles to producing green iron in Australia, the report says, and government and businesses need to invest to beat rival nations racing to cash in on the opportunity. The Superpower Institute released the findings in its Green Iron Plan for Australia report on Monday, analysing potential restrictions and opportunities to establishing a local industry. The research comes three months after the government announced a $1 billion investment in green iron production, including $500 million to support existing and new developments. Green iron is produced using renewable energy resources such as hydrogen and electricity generated by the sun and wind rather than coal or gas, and has the potential to cut 90 per cent of emissions from the steelmaking process. Australia is considered a strong potential green iron producer as it is the world's biggest iron ore exporter, but the report identified three obstacles to its production. Early investors were not being given enough financial support, infrastructure to support its production was lacking, and the absence of an international carbon price made it hard to compete with fossil fuel-based iron, the report found. If these issues were addressed, Australia could have a clear pathway to producing green iron, cutting emissions and taking advantage of its natural resources, Superpower Institute chair Rod Sims said. "If anyone is going to make green iron, it's going to be Australia," he told AAP. "Every international study I've seen - and I've seen a few - says that if you want green iron, Australia is either one of the small number of top places or is the best place to do it." Introducing a green iron production tax credit of $170 per tonne could temporarily address the lack of a carbon price, the report found, while grants of up to 30 per cent could help to establish early green iron projects. Other recommendations include introducing a green hydrogen certification scheme and researching trade opportunities. Australia could generate up to $386 billion a year from green iron by 2060, the report found. Mr Sims said the nation should aim to have between two and four projects in operation by 2030. "Australia is the world's largest producer of gas and coal combined but they will go down as the world moves to net zero, therefore you need a foot in the other camp," he said. Small green iron plants are already planned in countries including Germany, Sweden and Namibia. Green iron projects in Australia include Fortescue's Christmas Creek project, expected to begin production before the end of 2025, and a $3.5 billion Gladstone project backed by Quinbrook Infrastructure Partners. Government commitments to green metals include $750 million from the Future Made in Australia fund and $500 million from the Green Iron Investment Fund. Productivity Assistant Minister Andrew Leigh said the government would seek to make strategic investments to help establish the industry. "No one thinks public investment is a substitute for private capital," he said. "There are moments, especially during structural transitions, when governments can play a useful role in reducing uncertainty, addressing market failures, and de-risking early stage ambition." Australia has a unique opportunity to trade its dirty coal and gas industry for cleaner green iron market and make four times the revenue from its export by 2060, a study suggests. But there are hurdles to producing green iron in Australia, the report says, and government and businesses need to invest to beat rival nations racing to cash in on the opportunity. The Superpower Institute released the findings in its Green Iron Plan for Australia report on Monday, analysing potential restrictions and opportunities to establishing a local industry. The research comes three months after the government announced a $1 billion investment in green iron production, including $500 million to support existing and new developments. Green iron is produced using renewable energy resources such as hydrogen and electricity generated by the sun and wind rather than coal or gas, and has the potential to cut 90 per cent of emissions from the steelmaking process. Australia is considered a strong potential green iron producer as it is the world's biggest iron ore exporter, but the report identified three obstacles to its production. Early investors were not being given enough financial support, infrastructure to support its production was lacking, and the absence of an international carbon price made it hard to compete with fossil fuel-based iron, the report found. If these issues were addressed, Australia could have a clear pathway to producing green iron, cutting emissions and taking advantage of its natural resources, Superpower Institute chair Rod Sims said. "If anyone is going to make green iron, it's going to be Australia," he told AAP. "Every international study I've seen - and I've seen a few - says that if you want green iron, Australia is either one of the small number of top places or is the best place to do it." Introducing a green iron production tax credit of $170 per tonne could temporarily address the lack of a carbon price, the report found, while grants of up to 30 per cent could help to establish early green iron projects. Other recommendations include introducing a green hydrogen certification scheme and researching trade opportunities. Australia could generate up to $386 billion a year from green iron by 2060, the report found. Mr Sims said the nation should aim to have between two and four projects in operation by 2030. "Australia is the world's largest producer of gas and coal combined but they will go down as the world moves to net zero, therefore you need a foot in the other camp," he said. Small green iron plants are already planned in countries including Germany, Sweden and Namibia. Green iron projects in Australia include Fortescue's Christmas Creek project, expected to begin production before the end of 2025, and a $3.5 billion Gladstone project backed by Quinbrook Infrastructure Partners. Government commitments to green metals include $750 million from the Future Made in Australia fund and $500 million from the Green Iron Investment Fund. Productivity Assistant Minister Andrew Leigh said the government would seek to make strategic investments to help establish the industry. "No one thinks public investment is a substitute for private capital," he said. "There are moments, especially during structural transitions, when governments can play a useful role in reducing uncertainty, addressing market failures, and de-risking early stage ambition."
Perth Now
25-05-2025
- Business
- Perth Now
Australia urged to spend big while green iron is hot
Australia has a unique opportunity to trade its dirty coal and gas industry for cleaner green iron market and make four times the revenue from its export by 2060, a study suggests. But there are hurdles to producing green iron in Australia, the report says, and government and businesses need to invest to beat rival nations racing to cash in on the opportunity. The Superpower Institute released the findings in its Green Iron Plan for Australia report on Monday, analysing potential restrictions and opportunities to establishing a local industry. The research comes three months after the government announced a $1 billion investment in green iron production, including $500 million to support existing and new developments. Green iron is produced using renewable energy resources such as hydrogen and electricity generated by the sun and wind rather than coal or gas, and has the potential to cut 90 per cent of emissions from the steelmaking process. Australia is considered a strong potential green iron producer as it is the world's biggest iron ore exporter, but the report identified three obstacles to its production. Early investors were not being given enough financial support, infrastructure to support its production was lacking, and the absence of an international carbon price made it hard to compete with fossil fuel-based iron, the report found. If these issues were addressed, Australia could have a clear pathway to producing green iron, cutting emissions and taking advantage of its natural resources, Superpower Institute chair Rod Sims said. "If anyone is going to make green iron, it's going to be Australia," he told AAP. "Every international study I've seen - and I've seen a few - says that if you want green iron, Australia is either one of the small number of top places or is the best place to do it." Introducing a green iron production tax credit of $170 per tonne could temporarily address the lack of a carbon price, the report found, while grants of up to 30 per cent could help to establish early green iron projects. Other recommendations include introducing a green hydrogen certification scheme and researching trade opportunities. Australia could generate up to $386 billion a year from green iron by 2060, the report found. Mr Sims said the nation should aim to have between two and four projects in operation by 2030. "Australia is the world's largest producer of gas and coal combined but they will go down as the world moves to net zero, therefore you need a foot in the other camp," he said. Small green iron plants are already planned in countries including Germany, Sweden and Namibia. Superpower Institute chief executive Baethan Mullen said Australia should not delay investments. "The global race to secure green iron production is already underway," he said. Green iron projects in Australia include Fortescue's Christmas Creek project, expected to begin production before the end of 2025, and a $3.5 billion Gladstone project backed by Quinbrook Infrastructure Partners.
West Australian
25-05-2025
- Business
- West Australian
Australia urged to spend big while green iron is hot
Australia has a unique opportunity to trade its dirty coal and gas industry for cleaner green iron market and make four times the revenue from its export by 2060, a study suggests. But there are hurdles to producing green iron in Australia, the report says, and government and businesses need to invest to beat rival nations racing to cash in on the opportunity. The Superpower Institute released the findings in its Green Iron Plan for Australia report on Monday, analysing potential restrictions and opportunities to establishing a local industry. The research comes three months after the government announced a $1 billion investment in green iron production, including $500 million to support existing and new developments. Green iron is produced using renewable energy resources such as hydrogen and electricity generated by the sun and wind rather than coal or gas, and has the potential to cut 90 per cent of emissions from the steelmaking process. Australia is considered a strong potential green iron producer as it is the world's biggest iron ore exporter, but the report identified three obstacles to its production. Early investors were not being given enough financial support, infrastructure to support its production was lacking, and the absence of an international carbon price made it hard to compete with fossil fuel-based iron, the report found. If these issues were addressed, Australia could have a clear pathway to producing green iron, cutting emissions and taking advantage of its natural resources, Superpower Institute chair Rod Sims said. "If anyone is going to make green iron, it's going to be Australia," he told AAP. "Every international study I've seen - and I've seen a few - says that if you want green iron, Australia is either one of the small number of top places or is the best place to do it." Introducing a green iron production tax credit of $170 per tonne could temporarily address the lack of a carbon price, the report found, while grants of up to 30 per cent could help to establish early green iron projects. Other recommendations include introducing a green hydrogen certification scheme and researching trade opportunities. Australia could generate up to $386 billion a year from green iron by 2060, the report found. Mr Sims said the nation should aim to have between two and four projects in operation by 2030. "Australia is the world's largest producer of gas and coal combined but they will go down as the world moves to net zero, therefore you need a foot in the other camp," he said. Small green iron plants are already planned in countries including Germany, Sweden and Namibia. Superpower Institute chief executive Baethan Mullen said Australia should not delay investments. "The global race to secure green iron production is already underway," he said. Green iron projects in Australia include Fortescue's Christmas Creek project, expected to begin production before the end of 2025, and a $3.5 billion Gladstone project backed by Quinbrook Infrastructure Partners.
The Age
18-05-2025
- Business
- The Age
Want greater productivity? Set wages to rise by 3.5 per cent a year
Remember this next time you see the (Big) Business Council issuing yet another report urging the government to do something to improve productivity. What businesspeople say about productivity is usually thinly disguised rent-seeking. 'You want higher productivity? Simple – give me a tax cut. You want to increase business investment in capital equipment? Simple – introduce a new investment incentive. And remember, if only you'd give us greater freedom in the way we may treat our workers, the economy would be much better.' Why do even economists go along with the idea that poor productivity must be the government's fault? Because of a bias built into the way economists are taught to think about the economy. Their 'neoclassical model' assumes that all consumers and all businesspeople react rationally to the incentives (prices) they face. So if the private sector isn't working well, the only possible explanation is that the government has given them the wrong incentives and should fix them. Third, businesspeople, politicians and even economists often imply that any improvement in the productivity of labour (output per hour worked) is automatically passed on to workers as higher real wages by the economy's 'invisible hand'. Don't believe it. The Productivity Commission seems to support this by finding that, over the long term, improvement in labour productivity and the rise in real wages are pretty much equal. Loading Trouble is, as they keep telling you at uni, 'correlation doesn't imply causation'. As Nobel Prize-winning economist Daron Acemoglu argues in his book Power and Progress, workers get their share of the benefits of technological advance only if governments make sure they do. Fourth, economics 101 teaches that the main way firms increase the productivity of their workers is by giving them more and better machines to work with. This is called 'capital deepening', in contrast to the 'capital widening' that must be done just to ensure the amount of machinery per worker doesn't fall as high immigration increases the workforce. It's remarkable how few sermonising economists think to make the obvious point that the weak rate of business investment in plant and equipment over the past decade or more makes the absence of improvement in the productivity of labour utterly unsurprising. Fifth, remember Sims' Law. As Rod Sims, former boss of the competition commission, often reminded us, improving productivity is just one of the ways businesses may seek to increase their profits. It seems clear that improving productivity has not been a popular way for the Business Council's members to improve profits in recent times. My guess is that they've been more inclined to do it by using loopholes in our industrial relations law to keep the cost of labour low: casualisation, use of labour hire companies and non-compete clauses in employment contracts, for instance. Sixth, few economists make the obvious neoclassical point that the less the rise in the real cost of labour, the less the incentive for businesses to invest in labour-saving equipment. So here's my proposal for encouraging greater labour productivity. Rather than continuing to tell workers their real wages can't rise until we get some more productivity, we should try reversing the process. We should make the cost of labour grow in real terms – which would do wonders for consumer spending and economic growth – and see if this encourages firms to step up their investment in labour-saving technology, thereby improving productivity of workers. Federal and state governments should seek to establish a wage 'norm' whereby everyone's wages rose by 3.5 per cent a year – come rain or shine. That would be 2.5 percentage points for inflation, plus 1 percentage point for productivity improvement yet to be induced. Think of how much less time that workers and bosses would spend arguing about pay rises. Governments have no legal power to dictate the size of wage rises. But they could start to inculcate such a norm by increasing their own employees' wages by that percentage. The feds could urge the Fair Work Commission to raise all award wage minimums by that proportion at its annual review. If wages of the bottom quarter of workers kept rising by that percentage, it would become very hard for employers to increase higher wage rates by less. A frightening idea to some, maybe, but one that might really get our productivity improving.
