If wishes were horses, then beggars would ride. And if wishes were new technology, then Victoria’s Latrobe Valley would be a mining export hub to rival the Pilbara. But wishes are neither horses nor new technology and Victoria’s Latrobe Valley is not going to be exporting brown coal any time soon.
Last week’s announcements about the potential for brown coal exports from Victoria, fail on both technological and economic grounds. There are good reasons why Victoria’s brown coal from the Latrobe Valley is used just for electricity generation in the Latrobe Valley. Brown coal has a high moisture content and must be dried before it can be used. If it is transported before drying, then transport costs are high. Effectively, you are transporting as much water as coal. Once dried, however, brown coal is volatile and difficult to handle.
New technology may make it viable to treat brown coal and make it like black coal, in terms of moisture content and handling. However, Australia already has large supplies of black coal. While brown coal is easy to mine, the technology needed to make it exportable would have to be extremely cheap before brown coal exports could compete with black coal.
What, then, explains last week’s political statements? Beyond wishful thinking, both federal and eastern-state politicians face significant problems. As CommSec’s April State of the States’ report notes, Australia has a three-speed economy, with Western Australia well out in front. This imbalance makes economic management difficult.
To make matters worse, the federal government appears to have painted itself into an economic corner. It is insisting on returning the federal budget to surplus in the next financial year. While this sort of fiscal tightening makes sense for the boom regions of Western Australia and parts of Queensland, it makes no economic sense for the rest of Australia.
At the same time, the federal government appears to be lobbying the Reserve Bank of Australia to ease monetary policy. However, monetary policy is a poor tool to deal with economic imbalance. Fiscal policy can use selective subsidies and taxes to target particular regions that are economically distressed. In contrast, monetary policy cannot be targeted at particular regions. Lax monetary policy and lower interest rates have an Australia-wide impact. It may help manufacturing in the eastern states but it may also lead to a property bubble in Perth.
Government belt-tightening means that any substantial investment that could transform the Latrobe valley into a coal export hub is unlikely to be forthcoming. Private industry is unlikely to fund such a scheme by itself in the absence of proven technology and without export contracts in hand. And with the fiscal brakes being applied at the federal level, there is unlikely to be any government investment in a coal export hub. So the conclusion is simple – there will be no coal-based export hub in eastern Victoria.
However, this does not spell doom and gloom for the region for two reasons. First, the Latrobe Valley is located in the heart of Australia’s dairy industry. Growth in Asia has not simply pushed up prices for iron ore and coal, it has also increased demand for high-quality food, including dairy products. There has been a significant world-wide increase in the demand for dairy products in recent years. This is leading to investment and expansion of output in New Zealand and in south-east Australia. This investment is likely to continue. So while a coal export hub seems unlikely, a dairy export industry is already flourishing both in the Latrobe Valley and throughout Victoria.
Second, the Latrobe Valley supplies Melbourne’s electricity, and Melbourne’s population is growing. With or without a carbon tax, Melbourne needs power and most of that power will come from the Latrobe Valley. The carbon tax means that there will be new investment in cleaner sources of power and much of this investment will occur in and around the Latrobe Valley. The simple reason for this is that the transmission infrastructure that is needed to get electricity from the generators to Melbourne is already based in the Latrobe Valley. This gives the Valley an economic advantage for anyone considering new generation investment.
Electricity investment may involve new gas-fired plant rather than traditional brown-coal electricity generation. But with gas reserves offshore in the Bass Strait, the region around the Latrobe Valley is well placed to benefit from this investment. So while the carbon tax may cause some dislocation in the Latrobe Valley, it is also likely to be accompanied by new investment projects.
The Latrobe Valley will not be Victoria’s Pilbara any time soon. And politicians who claim otherwise are simply blowing hot air. While the valley may not be heading for a boom, however, it does have natural advantages that will assist its economic performance.
Stephen King is a Professor of Economics and former Dean at Monash University in Melbourne, Australia.