Australia reels as Chinese interest shifts from rocks to real estate

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(Inside ASIA Today Saturday 1 October 2016)

Australia reels as Chinese interest shifts from rocks to real estate

Fragmenting rock by blasting in the Iron Valley mine in Western Australia.

Mining fuelled Australia’s surging exports to China,

which at their peak reached nearly US$100 billion (S$136 billion) a year.

Resource-rich places around the world prospered thanks to China’s rapid growth.

Photo: The New York Times

Chinese investors are fleeing the mining slump by investing in Australian homes
 

BEIJING — A lanky, dark-haired surfer, Mr Lee Meadowcroft modelled on the runways of London, Milan and Singapore, then followed his dream of going home to Australia to sell herbal medicines. His store failed — he had chosen the wrong street, he says — and he lost almost all his savings. By then, the fashion world had found fresher faces.

So like tens of thousands of other Australians, Mr Meadowcroft went to the mines.

It was late 2004. He ploughed his last US$4,000 (S$5,442) into a two-week course on how to operate a crane. He found companies so desperate for workers
they would send chauffeured cars to pick up prospective welders, electricians and crane operators and deliver them to the nearest airport for their flights to mining country, here on Australia’s remote north-western coast.

China, back then, was growing at a breathtaking pace and needed all the Australian rocks it could get. Mine workers like Mr Meadowcroft kept a punishing schedule: 13 consecutive days of 12-hour shifts, a day off, then another 13 consecutive days of 12-hour shifts. Mining fuelled Australia’s surging exports to China, which at their peak reached nearly US$100 billion a year — a figure representing US$4,300 for every man, woman and child in the country.

Resource-rich places around the world prospered thanks to China, and Mr Meadowcroft and his fellow Port Hedland equipment jockeys were no exception. By 2011 he was earning US$250,000 a year. He watched idle miners sketch circles in the dust and place cockroaches inside them, at times betting more than US$100 on which one crawled out first.

One welder bought a Ferrari 308 sports car, quickly tired of it and sold raffle tickets for US$1,000 apiece to get rid of it.

“Everyone just went crazy,” Mr Meadowcroft said.

The bust came just as hard and just as fast. China’s economic slowdown left too many mines to feed too many dormant Chinese steel mills. Construction of new mines stopped. Port Hedland’s economy slumped. Mr Meadowcroft lost his job, then lost a second job. Like thousands of others, he went back home.

Mr Meadowcroft’s tale could serve as yet another boom-andbust cautionary tale of the limits of China’s rise. From Russia to Brazil, and Nigeria to Venezuela, resource-rich countries that boomed during China’s surge found their economies shaken when Chinese demand slowed.

Except something unexpected has happened to Australia: It has withstood the global rout. Most mines — lower-cost compared with mines elsewhere — have stayed open. But Australia has also kept thriving, against all expectations, with a different kind of money flowing in from China.

Attracted by clean air, a strong education system and worries about China’s future, more Chinese are spending their money in Australia. Thousands of Chinese families have sent their children to study at costly Australian universities, and Australian food exports to China have boomed. Chinese investment in Australian real estate has increased at least tenfold since 2010; Chinese investors have purchased up to half the new apartments in downtown Melbourne and Sydney.

That has led to some soulsearching about the role of Chinese money in the country’s political and economic life. Businesses linked to China have become sizeable donors to Australian political parties, and a company said to have links to the Chinese military obtained a 99-year lease last year for a port next to a base that often houses United States Marines.

But for people like Mr Meadowcroft and others in Western Australia who were cut loose by the mining slump, Chinese money is a blessing. He now lives in the Western Australia capital city of Perth and works as an apprentice plumber in new housing developments aimed at Chinese buyers. He earns just US$21,000 a year, but that could double or triple when he finishes his apprenticeship.

When visitors from China enter his construction site, he knows they may be the eventual buyers. “If you see a group of Chinese people,” he said, “they’re the money.”

Colour of Prosperity
In Port Hedland, the colour of money is pinkish red. At the docks, the salmon-hued dust coats everything, from the railings atop the cranes to the rims of the fast moving conveyor belts that hurtle rocks toward the bellies of giant cargo vessels. When the mining boom started 50 years ago, the dust covered the streets, too.

“It made all your clothes go pink,” said Ms Julie Arif, a city council member who was still a girl when workers began digging mines in the nearby Pilbara desert and hills. “Pilbara pink, we used to call it.”

Back then, local leaders did not mind. “We’ll worry about our dust when it clogs the cash registers,” said the city’s mayor in the early 1970s, according to Ms Arif, who also runs the town’s small history museum. The pink dust comes from iron ore. And nobody sends more iron ore abroad than the state of Western Australia.

Iron ore transformed Port Hedland. Named “Marapikurrinya” by the local Aboriginal people, the town subsisted for years on wool exports and a few pearls gathered from oysters at low tide. Until the mining boom, its claim to fame was a late-1940s, threeyear strike by nearby ranch workers that became a pivotal moment in the assertion of Aboriginal rights in Australia.

The iron ore deposits were far from Australia’s steel industry on the country’s southern coast. But the Australian government began allowing large-scale iron ore exports in the 1960s, opening up the region to buyers from Japan and Europe.

As foreign money trickled in, Port Hedland remained rough around the edges. When Cyclone Joan flattened half of Port Hedland in 1975, the state government replaced the shattered hospital with a prefabricated structure propped up on the dirt with thin, foot-high steel poles. It stayed in use for nearly 40 years before it was abandoned, and now stands vacant on its oceanfront site.

For entertainment, there were the “skimpies” — stripper shows by young women who barely complied with state regulations against full nudity at the start of each evening, and were even less likely to comply as the hour grew late.

The ore is mined several hours’ drive into the desert from Port Hedland. Workers use explosives to shatter the rock at open-cut mines, then scoop it up with huge bulldozers. The ore is crushed and sorted by machines bigger than a house, then hauled to Port Hedland either by train or by enormous trucks — so-called road trains — pulling three or sometimes four trailers.

During a crimson, Indian Ocean sunset at Port Hedland’s Utah Point berth recently, a conveyor belt dumped iron ore into one of the seven large holds of a Chinese-owned freighter held in place by mechanical suction cups the size of minivans. A red gravel torrent rocketed downward at two tonnes a second, in a low, dull roar. Each hold was big enough for a capacious American home, with room to spare.

The crane lurched to one side, stopped disgorging iron ore, rumbled sideways to a position over a different hold, near the middle of the vessel, and resumed pouring.

Iron ore sometimes means dangerous work. Mr Meadowcroft once saw a taut, inch-thick steel cable snap and sweep a man into a pile of steel pipes. Another time, he saw a 23kg steel cable block fall on a worker, shearing off part of his face and shoulder and hurling him to the floor.

“It bounced him off the ground like a basketball,” Mr Meadowcroft said. “There was a lot of blood.”

But life was mostly quiet — and inexpensive. The town had eight amateur baseball teams, and many of the workers played after their shifts. Housing was affordable. Ms Sharon Ramirez, 40, remembers that her parents had a chance in the late 1980s to buy the bungalow they were renting for US$20,000 but decided not to.

“We didn’t jump at it,” she said, “because it was a lot of money in those days.”

The China Shock Wave
Everyone in Port Hedland has a story about a moment when the boom struck them.

For Ms Ramirez, it was when that rental home sold to an outof-town investor for US$1 million. For Mr Dave McGowan, it was when four of the eight baseball teams disbanded because workers were putting in 12-hour shifts instead of eight-hour shifts. For Mr Daniel Connors, it was when a local garage, short of workers, told him that he had to make a reservation four months in advance to get the oil in his car changed.

China was changing — and it changed Port Hedland.

Three decades of economic reform in China, plus lower trade barriers after the country joined the World Trade Organization in 2001, lit a fire under the economy there. Skyscrapers blossomed by the hundreds in obscure cities. The nation has built 124,000km of expressway, almost all of it since 1997 and two-thirds more mileage than the interstate highway system in the US, on which China’s network is modelled.

All that construction meant that last year, China produced and consumed almost as much steel as the rest of the world.

To supply its steel mills, China needed Australia’s iron ore. Iron ore prices surged tenfold. Big companies such as BHP Billiton, Rio Tinto and Fortescue Metals Group rushed to build mines and add port berths as fast as possible.

The boom was on.

Little Port Hedland became one of the biggest ports in the world, handling a greater tonnage of freight each year than the ports of Los Angeles, Hong Kong or Antwerp, Belgium. Skilled welders and electricians earned as much as US$350,000 a year, drawing workers from around the country. The town’s population doubled, to a peak of about 30,000, and would have increased a lot more except that a dispute over Aboriginal claims to land on the city’s outskirts blocked construction and resulted in a housing shortage.

The town finally replaced its prefabricated hospital and added a swimming centre, an air-conditioned basketball arena, a new courthouse, a skateboard park and more. Outside Port Hedland, the state government in Perth spent on hospitals, new power lines and water systems, and a US$1 billion Australian football stadium.

But 6,437km away, trouble was brewing. China’s debt-choked developers were starting fewer buildings. Steel use fell 3 per cent in 2014 and an additional 5 per cent in 2015, even as more steel mills were being built in anticipation of never-ending growth. Manufacturers were becoming more cautious about putting up more factories.

The Collapse
Port Hedland felt the pain quickly. Iron ore prices plummeted. Worried that workers might get angry and damage multimilliondollar equipment, mining companies laid off tens of thousands of construction workers.

“One day they just called in the trucks for lunch, and they said: ‘Bring in your backpacks,’ which was unheard of,” said Mr Shannon Baker, a former power shovel operator at a mine near Iron Valley. “They got us together in the crew room and they said: ‘The planes are at the airport to take you out’.”

Rents and housing prices have fallen by three-quarters, said Mr Jim Henneberry, the owner of one of Port Hedland’s biggest real estate brokerage firms. A fifth of the town’s homes sit empty.

Mr Bill Dziombak spent US$1 million apiece to build luxury town houses here, only to see rents and prices collapse. “I never expected this to go bang the way it did, in just 12 months,” he said. “It was like falling off the edge of a cliff.”

Customers at Mr Camilo Blanco’s car repair garage no longer need reservations. “I’ve had customers coming in and saying, ‘This is the last time I’ll see you because I have to leave town,’” said Mr Blanco, who is also Port Hedland’s acting mayor.

Chinese Investment 2.0
Even in the middle of the worst of the mining slump, Australia has found a potential source of strength, again from China: People like Mr Ike Wang.
Mr Wang, 24, graduated last year from Murdoch University in Perth, where he was one of hundreds of students from mainland China. He is looking for a fulltime job in marketing, and, despite Western Australia’s slowdown, he has an advantage: His family back in Tianjin, China, paid US$370,000 at the start of this year to buy him a two-bedroom apartment.

The 13th-floor apartment is nearly empty of furniture. But it offers a good view of the city and has what seems like solid workmanship. (Coincidentally, Mr Meadowcroft did some of the plumbing for the complex.)

The apartment gives Mr Wang a free place to live while he decides his next move. “I like that it’s a new apartment,” he said. “Everything is new and clean.”

Real estate developers say that they see a lot of Chinese families eager to buy homes in Australia. “I think the investment return is the No 2 concern; it’s about getting money somewhere that is stable and safe, it’s about getting the money out” of China, said Mr Paul Blackburne, a developer of numerous Perth apartment complexes.

As in the US, low interest rates have also fanned demand for houses and apartments from local buyers. Australian government data shows that it approved US$18.2 billion in Chinese real estate investments in the year that ended June 30, 2015, twice as much as the year before and more than triple the total last year for the US, which was the secondlargest overseas investor. And developers say that a lot more Chinese money is quietly flowing into Australian real estate without government approvals.

Port Hedland and the entire state of Western Australia face budget problems. The state has begun moving to sell a 50-year lease on the Utah Point berth, possibly to a Chinese buyer, despite objections from smaller companies such as Mineral Resources, which owns the lowcost Iron Valley mine and cannot use the other docks because they are controlled by giant rivals like BHP. (Mr Meadowcroft coincidentally helped build the Utah Point berth as well.)

But unemployment has barely risen in Port Hedland or in Western Australia overall. Some, like Mr Meadowcroft, found jobs in Perth. Many moved east to Sydney and Melbourne to work in the construction sector there.

One worry in Australia is whether the country is on an economic trajectory similar to that of the US a decade earlier. Australia’s central bank warned in April that if Chinese demand faltered, Australia’s real estate market could suffer and the country’s banking system, heavily exposed to home mortgages, could be harmed.

But for now, Chinese money is still flowing. Many miners who squandered their earnings during the iron ore boom are trying to catch up in construction jobs. But many others socked away their money from the boom and have used their savings to buy homes or start small businesses.

“They were micro-entrepreneurs,” said Mr Tom Barratt, a University of Western Australia doctoral student who is doing his thesis on labour markets in the Pilbara hills.

Mr Meadowcroft is among those savers. He bought a house and soon paid off most of the mortgage. He also married his longtime girlfriend after years of commuting to far-flung mines and ports, and is now raising two children as he learns to be a plumber.

Although his savings account is much smaller now, he has no regrets about the boom years. “That was 12 years of really hard work,” he said, “to achieve what a lot of people don’t achieve in their whole lives.” The New York Times