Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

There's a well-known order of business for foreigners trying to invest in emerging markets. Before you do anything else, hand a slice of your consortium to a local oligarch who can open doors in government and help soothe nationalist sentiments.

Australia wouldn't normally be included in that basket. The country tends to score highly on the World Bank's ease of doing business index, and has been one of the world's top 10 recipients of foreign direct investment over the past five years. But recent foreign-investment decisions are giving the country an increasingly frontier feel.

Money Market
The value of foreign direct investment inflows into Australia over the past five years put it in the global top ten
Source: UNCTAD

A group of outback cattle barons at the weekend bid A$386 million ($294 million) for S. Kidman & Co., a vast ranching business whose land holdings cover an area larger than South Korea.

Kidman's sale process has been dragging on for more than a year, hobbled by some legitimate national-security worries and some not-so-legitimate fears of foreign investment. Part of the property is Anna Creek, an enormous cattle station in the semi-desert of South Australia that's adjacent to a missile-testing range where atomic bombs were detonated in the 1950s.

Treasurer Scott Morrison blocked the sale of that site to foreign buyers last November, but that wasn't enough to deter the Chinese-owned Dakang Australia consortium, which bid A$370 million-odd for the remainder in combination with a 20 percent Australian partner in April.

That offer was in turn blocked by Morrison just nine days after being lodged. Without a national security justification to fall back on, he instead cited "the size and significance of the Kidman portfolio" -- as plain a demonstration as you could get that the decision had been made purely on political grounds.

Undeterred, one member of the consortium, Shanghai CRED Real Estate, came back last month with a A$365 million offer in which it promised to take just 33 percent. The remaining 67 percent would go to Hancock Prospecting, the iron ore-mining company controlled by Gina Rinehart, Australia's richest woman and the closest thing the country has to a home-grown oligarch.

What does the local cattle barons' competing A$386 million proposal have to recommend it over that? When you consider that it will include Anna Creek -- excised from the Chinese-backed bids -- it doesn't appear to be offering any more money . That suggests the only advantage is that the consortium includes not one drop of foreign blood.

Usually in takeover battles, new entrants compete for the nod of shareholders, and the currency is the amount of money they're willing to pay. In this case, the competition is all for the benefit of politicians, and the currency is the size of the foreign stake.

As Gadfly has argued before, Australia's hostility to foreign farm investment is a self-inflicted wound. With its mining and natural gas booms winding down, the country should be taking advantage of China's desire for its agricultural assets, rather than letting petty xenophobia block deals that could provide jobs for Australian workers and exports to keep the current account in balance.

Neither a Borrower Nor a Lender Be
Australia's current account deficit was worse than the U.K.'s just nine months ago
Source: Bloomberg

With the government holding onto power thanks to 16 lawmakers from the Nationals party, long-time coalition partners whose leader has described himself as an "agrarian socialist," it's perhaps no surprise that politics got involved in the Kidman deal. The more troubling issue is the way the same tendencies have crept into other parts of the economy.

New South Wales state agreed last week to sell control of a government-owned electricity distributor to a consortium of local funds for about A$4.3 billion less than had previously been offered by China's State Grid. While skepticism about the government-owned Chinese company may be justified, Morrison's decision also ruled out all other foreign investors.

The decision lumped in Li Ka-shing's CK Infrastructure -- an independent company incorporated in Bermuda with utility assets on four continents -- with a business set up by China's cabinet whose chairman is also the Communist Party's chief commissar within the company.

Drying Up
Foreign direct investment inflows into Australia have fallen to their lowest levels in at least a decade
Source: UNCTAD
Note: The negative figure in 2005 was largely due to the reincorporation of News Corp. in the U.S.

Australia should be wary of being so picky. Foreign direct investment inflows in 2015 declined to their lowest level in at least a decade, and the economy can't fall back on a commodities boom as it has in the past. The country is a wealthy one, but a small one as well -- and small economies are wise to remain open to the world.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Indeed, when you consider that Anna Creek can carry 14,000 head of cattle -- about 7.5 percent of Kidman's total carrying capacity -- it's arguably at a modest discount. A 7.5 percent premium to the Rinehart-Shanghai CRED offer would come in at about A$392 million.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net