With commodities prices falling and a global recession looming, ALB's Cabral Douglas asks leading lawyers: Has Perth gone from boom to bust?
This time last year the wealth created by the insatiable demand for WA resources was reminiscent of the Victorian gold rush in the 19th century. But, this time round, iron ore took centre stage as Australian producers were able to negotiate an impressive 85% price increase with Chinese steel makers.
New deposits were discovered, IPOs hit the ASX running, plans to develop port and rail infrastructure were afoot and third party access was hotly contested, not to mention the frenzy of takeover offers on the table - all of which, of course, translated into enormous opportunities for Perth lawyers in 2008.
In fact, the outlook was so bright that Perth became home to several new boutique law firms; other mid-tier players like Middletons and Johnson Winter & Slattery also opened new offices, while the top-tier stalwarts bolstered their presence to cope with increased work flows.
Perhaps adding fuel to the flame, leading economists boldly forecast another five-year life span for the WA resources boom. These projections coupled with strong supply/demand fundamentals contributed to commodity and share prices hitting record highs, which encouraged even greater optimism.
Incredibly, the only potential stumbling block reported at the time was the shortage of skilled labour to meet the demands of an economy in overdrive.
Winds of change
The global financial crisis has brought about falling commodities prices, reduced demand and an ominous weakness in business confidence, and these challenges facing WA's economy in 2009 may just be the tip of the iceberg. The WA government slashed growth forecasts for 2009-10 from 6.5% to just 1.5%, as it saw a A$1bn hole in its budget due to reduced commodities royalties and stamp duty revenue. In addition, according to BIS Shrapnel, demand for office space in Perth will fall by two-thirds this year, triggering a rapid drop in rents and property value.
But although this paints a stark picture, it could serve as an enticement for firms looking either to set up shop or relocate their operations in advance of an economic recovery. While law firms operating in WA begin to feel the pinch, most of those ALB spoke to agree that Perth's proximity to Asia and the volume of large-scale projects already in the pipeline make it as good a place for business under the current gloomy economic circumstances as any, especially for those who take a long-term view.
Long-term view
Freehills infrastructure partner Jason Ricketts is among those looking at the bigger picture. "To some extent Western Australia may be more resilient than the rest of the economy. In fact the Chamber of Commerce and Industry (CCI) has reported that Western Australia is one of the areas in the industrial world best placed to cope with any sort of recession or uncertainty," he states. "Just yesterday BHP awarded Henry Walker Elton a A$400m contract for some expansion work on one of its ore bodies," he adds.
Ricketts also notes that his practice group has not seen any reduction in revenue and is, in fact, ahead of where it was this time last year. "There are a lot of resources project still going forward and a lot of mining companies that are cashed-up. We have projects that are going ahead and government has increased development spending," he declares. Ricketts - who advised Argyle Diamond Mines on its proposed underground expansion, among other major WA projects - is expecting his practice to continue to thrive.
"Good projects will get funding because banks and the financial houses can't just keep the money sitting in their organisations - otherwise they will go out of business. It's a matter of their confidence in a project," he says.
Dispute resolution
However, Mallesons dispute resolution partner Beau Deleuil notes that an increasing number of mine expansion contracts have been put on hold, resulting in a rising level of dispute resolution work among Perth practice groups. "We have seen quite a few large projects going into care and maintenance, and downsizing, as well as expansion projects brought to a halt in the mining sector," he says. "Where this has required breaches of contracts, that has occurred - and there have been some significant fights crystallised through it. So, we have seen the retreat in the mining sector produce a lot of dispute work."
Indeed, most observers have anticipated bitterly contested court battles, as parties' capacity to fulfil contractual obligations agreed to during boom times are no longer commercially viable. "Perhaps some of the provisions negotiated at that time were not focused too much on the possibility of this downturn and, in hindsight, they should have been," he says.
Fortescue Metals' unilateral termination of all its shipping contracts to avoid paying locked-in shipping prices could be a signal of future expectations for dispute resolution practices. According to Deleuil, the global financial crisis could mean dispute resolution is used more as a bargaining chip to drive a better commercial result. "In this environment, parties are simply saying: 'Look, we are either terminating this contract or we will engage in dispute resolution processes - but we are not paying you any more unless we can rewrite the contract at 30% less'," he explains. "In that scenario, the counter party has two options: hold steadfast in their position and see it through to the end of the dispute resolution process - or try and strike a deal. It's easier to strike a new deal in terms acceptable to both parties than try to gauge the benefits of a booming market. It's a case of: 'I can either be tied up in litigation for years and not see a cent, or I can maintain some cash flow, keep my people employed, and keep the projects going'," he says.
New business model
One firm that has made quite a name for itself in Perth legal circles is Cochrane Lishman. Established by ex-Mallesons partners Ian Cochrane and Michael Lishman, it has acted in over A$9bn worth of M&A deals since January 2006. Partner Michael Lishman says that the secret of their rapid success in Perth was based on the principle of doing what you do well, and sticking to it, and this philosophy has brought the firm top-tier work at higher charge-out rates, while it has kept costs down. "We've got eight lawyers [four of them partners] which makes us reasonably big ... and we don't have any other areas of practice - just M&A," he states. "One of the factors that distinguishes us in the marketplace is that we don't send in masses of lawyers to act on a matter. The work we do is very senior-lawyer-intensive, but if we need other assistance, we can source it," he adds.
With over A$4bn in transactions for 2008, Cochrane Lishman was ranked 14th by mergermarket in the league table that year for legal advisors to Australasian M&A transactions (by volume). The firm expects its business model to help keep profits up, especially during a recession. "You don't see firms like Linklaters laying off the top partners even though they are the most expensive players in the organisation," he says. According to Lishman, the firm provides clients with a unique value proposition. "They are getting top-tier quality legal advice from individuals who have come from that environment."
Closer to Asia
Middletons is another firm that has been extremely optimistic about the Perth market in 2009 - so much so, it took the decision to expand into it, even in the face of gathering storm clouds late last year. And so far, managing partner Nick Nichola does not have any regrets. "It probably panned out the way we expected," he says, "which was that there has certainly been some slow-down in significant large-scale M&A activity - and just the sheer volume of it - but there's still a lot of activity at the smaller end, and there will be a lot of consolidation in that space."
According to Nichola, the current climate has created the need for a more strategic approach to consolidation. "Some will consolidate to become stronger and others will do it to survive," he says, "as a way of positioning themselves to become bigger, better and stronger when the economy does pick up."
The firm entered the Perth market by means of a three-way merger with two local firms, Salter Power and Franklyn Legal. The eight-partner office came into effect last December and has a full-service offering. As Nichola sees it, not only does the Perth market afford long-term growth prospects but the move also positions the firm closer to the Asian market. "One of the attractions of having a more significant presence in Perth, as opposed to just a 'fly in fly out' arrangement, is to have the local knowledge and expertise," he says. "But it is also an opportunity to use the office as a springboard to overseas jurisdictions, particularly in Asia."
Interconnection
Indeed, much of the prosperity in WA has been tied to Asian demand and, as Nichola points out, in a world of economic upheaval, Asia may well emerge as the bright spot. "Notwithstanding the fact that China and India are having difficulties - like the rest of the world - they are in a different situation to, say, the US, the UK and Japan. I think China and India in particular will still continue be in growth mode - not at the same pace as the past few years perhaps," he says, "but in comparison to other parts of the globe."
However, although some of Nichola's clients may be in distress, he is anticipating great opportunities in energy & resources to emerge in the short term. "Some of them are dependant on the recovery of commodities prices, and will have a challenging time until they do recover, but my personal view is that people will adjust their expectations," he says, "just as the rest of the market is adjusting. We have seen it happen in the property market - I think it will also happen in the resources market," he adds.
"A lot of the organisations that have relied on the resources boom have enjoyed exceptionally good prices over the last few years, so what is happening now is a bit of a realignment in terms of supply and demand - and I don't necessarily see it as a bad thing. I just see it as an adjustment or a correction - whatever you want to call it. It's just that it might take a bit longer than it has in previous years."
Recent events like the announcement by Chinese Premier Wen Jiabao of an expected 8% growth in the Chinese economy this year and renewed interest from Chinese investors - such as the A$14bn investment by Chinese giant Chinalco in Rio Tinto for example - are all encouraging signs for WA.
But conversely, an increasing number of projects being placed on hold, activity in the uranium sector slowing with the election of the pro-nuclear liberal party and a rise in insolvency instructions all indicate that it could still be some time before activity there returns to 2007 levels. ALB