OUT OF COAL AND INTO NEW FRONTIER

OH dear, oh dear: has Rob Scott, the CEO of Australia’s formerly biggest retail group Wesfarmers jumped out of the coal frying pan and straight into the rare earths fire?

There is only one word to describe the Wesfarmers bid for the Malaysian Lynas Corporation. Courageous.

Wesfarmers getting out of coal made sense on a whole series of levels – but has now been thrown into very stark relief by the decision to pour money into Malaysia and take Wesfarmers right into the middle of global geopolitics.

The “de-coaling” was especially appropriate after Scott’s predecessor as CEO, Richard Goyder, made Wesfarmers the country’s biggest retailing group with his own “courageous” move to pay $20 billion for the Coles Group at the start of his time in the top job.

All through his time as CEO Goyder bizarrely refused to acknowledge that making the company the country’s biggest and most diversified retailer meant that it had become, well, a retailer and was no longer the “conglomerate” of romantic Wesfarmers history.

He even stubbornly persisted with the claim that it remained a conglomerate even as he set about “de-conglomerating” by selling out of insurance and most particularly of course coal – at every such step making Wesfarmers ever more concentrated in, well, the thing it wasn’t. Retail.

On succeeding Goyder as CEO, Scott completed the “de-coaling”. It made sense for one reason alone.

Unless the Wesfarmers brains trust was of a mind to start selling coal through Bunnings warehouses – perhaps for mini home, dare I say it, “retail” power generators; or home delivering coal with the groceries – perhaps for oldis-new again stoves to cook them on, it just made no sense for the country’s biggest, if you’ll pardon the word, retailer, to be in the coal business. Especially when it was such a peripheral player in coal. It needed to get bigger or get out.

Further, a retailer – even a “don’t call me a retailer” type of retailer – just didn’t need the agro that was going to come from those who wish to take us back to an 18th-century future against those that want to try to keep us in the 21st.

That said, coal did have one big thing going for it: it was all in Australia. That’s a place Wesfarmers and its management has some local knowledge about. It’s also a place which, up to a point and still for the moment, respects the rule of law.

YOU – mostly and still for the moment – don’t get assets arbitrarily confiscated on whims or because the government might be playing some global political game. Well, at least, mostly.

Anyway, Scott and Wesfarmers have opted to throw a lot of “knowledge” and experience out the window, by spending $1.5 billion – ending up where: $3 billion? $10 billion? – plunging into a totally new business, pregnant with geopolitical issues and, critically, in a totally new country.

The attempt to take Bunnings into the UK didn’t work out that well. And that was a business that Wesfarmers was, literally, the world’s expert in; and the UK is another one of those quaint countries that, again mostly still, respects the rule of law and mostly in a way that we (and Wesfarmers) are familiar with.

Lynas looks to have fabulous rare earth resources. Yes, that is in Wesfarmers’ “home town” – Western Australia. But the all-important processing plant is in Malaysia. And it’s got some “issues” with radioactive waste material.

There are plenty of examples of Australian corporates operating in countries similar to Malaysia which end up having “issues”.

Sometimes you have to be there – like Rio Tinto and its fabulous Oyu Tolgoi copper resource in Mongolia. But with Lynas and its rare earths production chain, the very thing that makes it so appealing is also what makes it so dangerous.

It’s the single major alternative to China’s dominance in the industry.

If it is as good as it seems, it will almost certainly – correction, it will – become a pawn between, at least, China, the US and Malaysia.

Now maybe there’s a functional fallback. The resource is in Australia; functionally you could bring the plant back here – after dealing with (dark) green, black and red tape.

But even apart from the cost, good luck with that if we still can’t (and never will) build a low-grade nuclear medical waste disposal plant anywhere in the second most sparsely populated continent on the planet.

Scott’s big move since moving into the job was to float off Coles. Although, that hardly made Wesfarmers any less a retailer; it just made Bunnings even more dominant. Perhaps he’s anxious to prove his “conglomerate credentials”.

The market was unimpressed, marking Wesfarmers down 3 per cent. I’d say that was generous – or perhaps it’s telling us that the project is not going to succeed.